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Smart Investing
Investors have reason to celebrate Reserve Bank transparency
 December 10, 2007
Robin Bowerman
Central bankers do not fit the profile of big party animals.
They are more the tight-lipped, buttoned-up sort of guys whose idea of a wild time is curling up with the latest macroeconomic dissertation.
But our own central bank board – led by Glenn Stevens, Governor of the Reserve Bank – has at least done the right thing for the festive season by not lifting rates this month. For some people that will be reason enough to celebrate but it was the other decision taken at this week’s Reserve Bank board meeting that investors really ought to be applauding.
Transparency is an investor’s best friend and the bank’s decision to begin publishing its rationale and minutes of the meetings will help everyone understand where the economy is and, more interestingly, where the best economic brains in the country think the risks are.
Monetary policy is a dry topic but it fundamentally affects and underpins our standard of living so taking the time to read the Reserve Bank’s summaries each month could be very educational for investors – and best of all it is free on the RBA website.
Central bankers traditionally are members of one of the most exclusive and closed clubs in the world with practitioners masters at a mixture of arcane science and economic art.
But as the former chairman of the US Federal Reserve, Alan Greenspan, demonstrated to great effect a central banker sharing their concerns publicly can be a very effective way of reining in market sentiment – investors around at the time certainly took notice when he described the technology stock boom as "irrational exuberance".
But market conditions and structures do not stand still and macro economic policy and central bankers have to adapt as well. So the announcement this week from the Reserve Bank is a sign that our central bank is moving to stay up with world best practice and that is a positive thing for both professional investors – who will analyse and discuss every nuance of the statements – and individual investors who are more worried about mortgages and margin loans.
The sub-prime mortgage mess in the US has been the latest test for central bankers’ nerves but the signs so far are that – with the possible exception of the UK – central bankers have done pretty well at handling the severe liquidity shock that the US sub-prime situation caused.
Indeed the US Federal Reserve was writing about and worrying about the sub-prime situation almost 12 months before the crisis hit so while it may have been a surprise to the broad investor population it was certainly on the central banker radar as a concern.
The uncertainty and threat to global economic growth, somewhat ironically, is a key reason rates are not being lifted this side of Christmas. There seems little doubt reading the Reserve Bank’s statement is that it is concerned about inflation heading up and outside its target 2-3% range but the international growth outlook has deteriorated to the point where it has decided to stay its hand on the interest rate trigger.
But the risk of further interest rate rises in the early part of 2008 is real – a fact worth keeping in mind as we head into the silly season for spending.
Glenn Stevens may be a Reserve Bank Governor prepared to be more open than his predecessors but as he demonstrated through the election campaign he is also prepared to dole out tough fiscal medicine when he believes it is required.
More articles from this edition of CompareShares:
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Stocks: Double digit returns likely in 2008
Trading: The ultimate guide to trading shares for beginners - part 5
Stocks: Stock of the Week: Saferoad Holdings
Smart Investing: Investors have reason to celebrate Reserve Bank transparency
Markets: Australian economy steaming along nicely despite US sub-prime crisis
Trading: Top Ten CFD stocks for the week
Stocks: Stock to watch: Greencross
Companies: BHP takeover bid 'dead': Rio Tinto CEO
Whatever your views, you can discuss this article - or any of Robin's articles - on our message board Your 2 Cents.
Robin Bowerman is Head of Retail at index fund manager Vanguard Investments Australia and the former managing editor of Shares and Personal Investor magazines. To receive this column by email each week go to http://www.vanguard.com.au/ and register with smart investing.
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