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Date: April 30 2012
MORTGAGE holders will no doubt welcome any reduction in official interest rates which most economists expect tomorrow. If passed on, lower borrowing costs could act as an important shot in the arm to businesses in non-mining parts of the economy struggling with softer trading conditions.
Inflation figures released last week suggest price rises have moderated sufficiently to enable the Reserve Bank board to lower rates, if it chooses. But there remain good reasons for the Reserve to keep a firm hand on the interest rates lever. A number of temporary factors - including falling banana prices - helped drive inflation lower in the quarter. Cost increases for non-tradeable, domestically produced goods and services, such as electricity, health and education, remain stubbornly high.
Whatever happens tomorrow, it is inevitable interest rates will remain uncomfortably high for some parts of the economy. The mining boom is boosting some industries but the higher Australian dollar - a byproduct of the boom - is harming others.
There are voices calling on the bank's board to cut interest rates to reduce the value of the exchange rate and ease such pressure. But such calls must be rejected outright. It is unclear that such a strategy would even bring about the desired object of a lower exchange rate. Lower official interest rates would reduce the return on dollar-denominated assets, lowering demand for them, and hence, the dollar. But lower interest rates, by stimulating growth, could also lead to higher inflation and, in turn, the need for higher interest rates. It is impossible to know how financial markets, which largely determine the level of the exchange rate, would react to such a strategy.
The fact remains that Australia has a well-established monetary policy mechanism that has served us well. The independent decision-makers who make up the Reserve's board demonstrated during the global financial crisis how effective their interest rate decisions could be at stimulating growth when needed. Similarly, recent low inflation figures demonstrate how higher interest rates can curb inflation.
Experience has shown that politicians, with their sympathy for voters, would leave interest rates lower than required to keep inflation in check. Now is the time for the government to get out of the way and leave the Reserve to manage short-term fluctuations in the macro-economy.
So far, the Reserve's deliberations have helped deliver an economy with low inflation, low joblessness and growth returning to trend. If it ain't broke, don't fix it.
School tests need close watch
NAPLAN, the national assessment program to test literacy and numeracy skills at key points of early- and middle-school education, was adopted in full awareness that it was not free of risk of being abused. From similar schemes in Britain and elsewhere came anecdotes of schools ''teaching to the test'' to engineer favourable outcomes - a risk enhanced when the salaries and bonuses of principals and teachers were linked to the results.
Already, in the short three years of Australia's scheme some of these abuses are being reported. We have had reports that some parents in Sydney have hired tutors to prepare children as young as seven for tests next month, after pressure from overzealous principals created anxiety about a poor showing for their schools. In Western Australia, authorities are checking a reported case of a teacher improving a pupil's score after test papers were handed in.
Now we have a group of education consultants encouraging parents to withdraw their children on the grounds that the test system damages creativity. The tests are voluntary, and parents are perfectly at liberty to do so. But until now, the worry about non-participation came from the stories about schools encouraging underperforming students to stay at home on the day of the tests, to rig the average. A large-scale boycott, especially by the better students, would make the tests quite meaningless.
That is probably the aim of the ''Say No to NAPLAN'' group, which seems to be drawn mostly from the ranks of long-time teachers and the teachers' trade union, the Australian Education Union. The union says the campaign is independent but it will be launched at its office in Melbourne and has been given union resources. Entrenched in the status quo of largely seniority-based reward, public school teachers have fought hard against NAPLAN, fearing the consequence of measured, comparative performance between schools.
The fears should not be dismissed. There is a risk of simplistic league tables being based on the test scores, without weighing the socio-economic backgrounds of school student bodies, or taking into account the teaching skill and dedication involved in bringing disadvantaged children up to average levels. Nor should the criticisms of the ''Say No'' group be dismissed about the dangers of teaching to the test, at the expense of wider education. But NAPLAN is an attempt to focus resources where they are most needed. The attention should be on spotting attempts to finesse the system.
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