the wisdom to know the difference…

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My friend Chris Joye often goes after the business people on the RBA board, and I agree that asking them to tighten policy is like asking a Turkey to vote for Thanksgiving – but I also think the presence of Treasury on the board deserves scrutiny.

Treasury are no Angels and would be arguing the Government’s position. Treasury have clearly been arguing the ‘no rate hike’ line – note the recent pieces on CPI and monetary policy by Martin and Colebatch, their favoured journos…

When Stevens was brave and raised rates during an election, the Government was in caretaker mode and Treasury would not necessarily have been arguing the Government’s line – indeed, Ken so hated the Howard Government, that I would be surprised if he wasn’t arguing for a tightening.

Anyhow, we will never know why, but most of all it is a shame the RBA has blinked. Our inflation outcomes are similar to Europe, and our economy is stronger – and yet it is the ECB that has the courage to settle for controlling only what they are able. In the long run, the only thing a central bank can influence is the price level.

The global outlook is for stagflation, and the current Australian Government has probably pushed up the NAIRU as a result of their re-regulation of the labour market. All a central bank can do in this environment is to keep inflation low and stable – given this, earlier tightening is better.


  1. > Our inflation outcomes are similar to Europe, and our economy is stronger

    What’s the interest rate in the EU?
    Is our economy stronger than Germany / France?
    You really think a 0.25 hike would have magically put a cap on inflation?

  2. I’m flummoxed by this decision. At the least I was expecting they would ratchet up the rhetoric and soften us up for an October hike. Even given an “acute sense of uncertainty in global financial markets” you set policy for your base case economic forecast and deal with downside risks when they eventuate. The minutes in the past have clearly articulated this approach to monetary policy. H1’11 underlying inflation annualises at 3.5 per cent and warrants tighter policy.

    I guess it is not impossible that there is something really nasty in the June retail figures out tomorrow morning to which the RBA may have had pre-embargo access.

    Otherwise, barring the Board having gone tame, maybe they’re just waiting on the Q2 GDP figures and wanting to confirm solid momentum in the economy before hiking again?

    The fact McCrann seems to be getting things wrong these days does play to the notion of a split between RBA staff and the Board.

  3. There is NO evidence that Henry hated the previous government. given the inflationary forces at work an interest rise was the only option then.

    The Absurd debt ceiling agreement in the US means that economy will weaken since they wish to copy Japan, Japan is weak, the Euro area is weak so the decision doesn’t look that daft.

  4. That is merely Treasury complaining they are in on policies they should be.

    Treasury have been complaining ,rightly, about that since I have trawled Parliamentary corridors.

  5. Alternative view: Disaster averted on Tuesday thanks to our more balanced RBA board that listens to Treasury advice and includes people who operate in the real world. We all know Stevens and “Boom Boom” Battellino would have hiked several times months ago, which surely would have induced an east coast recession.

    Did you really expect that the non-mining economy would simply lay down and die, in the face the bullhawks’ insane plan to hike three times by Christmas, send the AUD north of $1.20 and decimate what’s left of the non-mining tradeables sector? For Christ sake guys, get out there and see what’s happening. The only stores that are busy are Apple and Xara Everywhere else is empty.

    1. Interesting, I was unaware that the reweighting made so much difference, and am a little surprised. If I had known that I would not have voted for a hike this week.

      Bigger picture though, I think he is over-egging things a bit. We all know that chain price measures are more accurate, and we know why they are better. Moreover, we all agree that it would be better to use one

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