Henry Thornton writes:

It would be too much to expect our central bank to be
moving interest rates yet. For a start, it’s most un-Australian to try to spoil
a party. And what a party we are having. Inflation at 2.5% in the June quarter was
firmly in the middle of the Reserve Bank’s target range, export prices are
rocketing, equity markets are booming, housing markets are still rising fast in
the resource states and may be recovering elsewhere, bond yields have remained
low, the currency hasn’t collapsed and the new era of economic reform has
arrived with the Coalition majority in the Senate. However, the deterioration in
the outlook is creeping up while we bask in the economic sunshine.

firmly believe that interest rates should have been higher earlier, and as a
result rates might by now be coming down. In reality, it’s going to be very hard for even a pre-emptive central bank to
act, to raise rates before the inflation genie has done her damage. Instead,
waiting until we can all see the threat – when it’s far too late – will
be the outcome. This is how hubris leads to a fall.

We see no prospect that the RBA will choose to surprise markets with
actual rate moves until those moves have been well telegraphed. Thus
all the interest swings from the RBA Board’s almost certain “no change”
decision today to what the RBA governor will say in his quarterly
Monetary Policy Statement next week. This of course will be positioning
for his subsequent appearance before the House of Representatives
Standing Committee on Economics, Finance and Public Administration. We
fully expect the governor to say the outcome owes much to luck and
something to good policy (if he’s sensibly humble), and that he retains
a tightening bias.

This will be just as well. The bad local news
is only just below the surface.

Read the full story here.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey