“Interest rates to rise further but not yet”. That’s the summary of Henry’s advice for today’s meeting of the Reserve Bank board, the first to be chaired by Glenn Stevens.
The subplot is more interesting, at least for aficionados of central banking. The evidence is that there has been a coordinated and successful global tightening of monetary policy to create a healthy correction of asset prices. One crucial input was supplied by Claude Trichet, President of the European Central Bank, as quoted in these pages by Gary Dorsch:
Coincidentally, the peak in the historic CRB index rally was recorded just three days after an 8 May meeting of central bankers from leading industrialized and developing countries in Basel, Switzerland. Jean-Claude Trichet, spokesman for the G-10 group of central bankers, urged members to avoid complacency, because inflationary expectations were rising during a period of high commodity and energy prices.
“It is not the time for complacency if we want this global growth to be sustainable. We have to be careful to see that this period of global growth does not end up in inflation. Global economic growth remains strong and steady, but there are elements there that call for very special attention, especially in terms of inflationary risks. We have to look at the inflationary risks with great attention,” Trichet declared.
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Henry’s latest article on monetary policy concludes:
Monetary policy must retain its focus on control of inflation. As indicated by the earlier discussion of recent global monetary policy, there is now a welcome focus on constraining asset inflation as well as goods and services inflation. New Reserve Bank Governor Glenn Stevens is on record as supporting this view, and this is a welcome development.
Stevens will be inclined to raise local cash rates as local asset prices again begin to rise, but he will also be keenly following the global issues impacting on monetary policy.
The global situation is such that further monetary policy tightening will almost certainly be needed. Australia’s particular circumstances are likely to include a strong recovery of consumer spending on top of strong investment spending by business. Wages growth has been creeping up and the tensions here are likely to rise despite the restraining influence of the new industrial relations framework.
Goods and services inflation is too high for comfort. This is the single economic statistic the Reserve will worry most about. This is why Henry believes at least two further rate hikes will be needed, although recent global developments may provide some breathing space.
Read more at Henry Thornton.