Another reason rates should increase

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I read Christopher Joye’s post on the performance of the Reserve Bank and thought it was a little unfair given that although inflation had been higher than their target recently hadn’t growth over this period been above average as well?

But actually when you look at the stats, that is not true. Growth in real GDP was higher in the mid to late 1990s than it is now, making the performance of the RBA even more underwhelming.

Indeed, since 1993 real GDP growth has averaged 3.5%, pretty much on the historical average. But since 2001 it has only grown at 2.8%, and at 1.7% since Sep 2007. As Joye shows these periods have been associated with higher inflation, even though lower growth has been experienced.

The growth in GNI mounts something of a defence for the RBA, as it has been at least more volative in the past few years. While average GNI is about the same, it has been substantially higher in periods and they were definitely caught on the hop in 2007-08.

I suppose in fairness to the RBA the mid to late 1990s were a period of recovery, when presumably capacity utilisation would have been lower. They were also a time of substantial budget cuts.

In comparison, since the mid 2000s governments have been increasing spending. The recent carbon tax announcement added another $4.3 billion to the budget bottom line and $10 billion to a “clean” energy finance corporation in off-budget spending.

With underlying inflation increasing, and a debt deal now done in the US, I think the RBA must increase rates. It can’t afford to let inflation run out of control as it did in 2007-08.

One comment

  1. It would be fair to note that not one but TWO rogue CPI numbers let the RBA and Market inflationary dangers were not near. without that occurred I doubt very much if Inflation would have reached the heights it did.

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