“The Board judged this to be an environment in which the risks of inflation exceeding 2-3% over the medium term remained significant. Monetary policy has been responding to these risks for some time, with increases in interest rates in May and August. Some effect of those measures is becoming evident in demand for credit by households. Nonetheless, the Board’s judgement yesterday was that a somewhat more restrictive stance of monetary policy was required in order to moderate inflation over time and thereby to secure sustainable growth”, states the RBA’s November announcement.

A feature of the political response to the Reserve’s rate hike has been to emphasise the cause of the rate rise — the economy having reached the zone of full employment — and the desirability of heading off the related inflationary pressures. This is a lot better than the time, not so long ago, when political government was asserting in public there was no need for rate hikes and fulminating in private about the “independence” of the Reserve.

Last week we got the bottom line of the Reserve Bank’s decision. Now we have the more detailed “Statement on Monetary Policy“. While there are no great surprises, this is the usual “good read” and provides additional insight into the thoughts of the gnomes of Martin Place.

In conclusion: “Recent information suggests little reason to change the Bank’s earlier assessment that in the near term, underlying inflation will continue to run at about 3%. Longer term, prospects for some moderation in underlying inflation has been improved by the policy actions taken this year. The Board will continue, over the months ahead, to assess whether these actions will prove sufficient to achieve the objective of 2-3% inflation over time.”

Note, gentle readers that, on this formulation, if underlying inflation continues to rise, more rate cuts will be inevitable. Henry’s pre-emptive 50 basis point rate hike in November might come to be seen as advice that ‘twould have been wise to heed.

Henry’s monthly advice to the board of the Reserve, said to be eagerly awaited by the hard-liners, is here.

Read more at Henry Thornton.

Peter Fray

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