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.