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Reserve Bank uneasy « Previous | |Next »
May 21, 2008

I see that the Reserve Bank has some doubts that it has done enough to constrain inflationary pressures and expectations and to ease wage and price rises. The increases in interest rates may not be enough to do the job. during a golden age of demand for its basic commodities, such as coal and iron ore). The Reserve Bank argues thus:

Looking ahead, members could see powerful opposing forces affecting the Australian economy. On the one hand, the slowdown in the developed economies, the ongoing strains in world financial markets and tight domestic financial conditions were working to slow demand and activity. Working in the other direction was the larger-than-expected stimulus to domestic incomes from the rising terms of trade that would flow from the very large recent increases in bulk commodity contract prices. Members acknowledged that the net effect of these forces on the prospects for growth and inflation was highly uncertain.Board members noted the importance of reducing inflation if Australia was to avoid a prolonged period of economic difficulty.

The staff forecast was that inflation would return to the target band by the end of the forecast period in 2010, if the recent slowing in demand was sustained. And then there is this:
The question therefore remained whether the setting of monetary policy was sufficiently restrictive to secure low inflation over time. Members spent considerable time discussing the case for a further rise in the cash rate. But on balance, given the substantial tightening in financial conditions since mid 2007, and the extent of uncertainty surrounding the outlook, the Board decided that it was appropriate to allow the current setting of monetary policy more time to work. However, should demand not slow as expected or should expectations of high ongoing inflation begin to affect wage and price setting, the outlook, and the stance of policy, would need to be reviewed. The Board would need to evaluate prospects for economic activity and inflation in the light of incoming information.

They are sitting on a tightrope. But they fear that they may have to increase interest rates in the future if inflationary pressures don't ease. in the short-term. That makes Malcolm Turnbull's job---working out an alternative economic narrative--- a lot harder doesn't it, especially when Treasury stands by the Reserve bank's mandate to target inflation.

In an address to the Australian Business Economists in Sydney Ken Henry, the Secretary to the Treasury, says:

there has been some questioning in recent times of the appropriateness of the inflation targeting regime for monetary policy that was adopted by the Reserve Bank in the early 1990s; that is, the policy rule that targets inflation of two to three per cent on average over the cycle. Given the significant contribution that the conduct of monetary policy has made to our relatively strong macroeconomic performance in the period since the adoption of that particular monetary policy framework, the fact of this questioning is quite peculiar. And today I want to explain why it is seriously misguided.

That won't help to boost the Liberals credibility as economic managers. That has been tarnished by them squandering the revenue from the resources boom on new spending and tax cuts when in government. They allowed the revenue from the mining boom to feed into the strong economic cycle and bequeathed the misery of resource-fueled inflationary bubble that inevitably led to an interest rate crunch.

| Posted by Gary Sauer-Thompson at 6:42 AM | | Comments (1)


Electoral memory is finite. Six years from now Labor will start to be on the nose and the anti-government campaigning will start to become effective again. Liberals require time to become an opposition party again.

There is probably some natural rhythm in a parliamentary system for a party previously in power to become a party of opposition again. Pretty brutal on those that would lead a party during that period though.