The Reserve Bank yesterday released its quarterly statement on monetary policy. After a slightly troubling 2006, it seems the Reserve enters 2007 feeling relaxed and comfortable.

Recent indications are that the world economy is continuing to grow strongly. The US economy has remained robust, and concerns that a downturn in the housing sector would significantly dampen activity have not so far been borne out. Information on other parts of the world remains consistent with expectations of strong aggregate growth. The Chinese economy has continued to expand at a double-digit rate, with recent policy measures having had some success in encouraging a shift from investment to consumer spending. In Japan, despite more moderate growth recently, improving conditions in the business sector and the labour market point to good prospects for further expansion. Growth in the rest of east Asia has remained firm, and in the euro area the indications are that a moderate pace of expansion is continuing. Overall, most observers expect world growth in 2007 to be a little below last year’s pace, but still above trend.

On the key issue of inflation, first the caution: “The consumer price index declined slightly in the December quarter, having been affected by a sharp fall in petrol prices and by the partial unwinding of the earlier spike in banana prices. Given these influences, a low CPI outcome in the quarter had been widely expected, and does not of itself constitute evidence of any broad-based easing in inflation pressures.”

Then the optimism: “As set out in the previous Statement, the situation following the November meeting was that underlying inflation had increased to around 3% but was tentatively forecast to decline somewhat in the period ahead. In the Board’s judgment, the new information available for the February meeting, and in particular the December quarter CPI figures, suggested grounds for a little more confidence in this forecast.”

But overall, the news is good for homeowners – it seems that the RBA believes that inflation is likely to moderate: “The central forecast is for year ended underlying inflation – currently around three per cent – to fall to 2.75% in 2007 and 2008”.

Alan Trounson from The Oz has pointed out there are (gasp!) vacancies on the RBA board, including the vital role of Deputy Governor. One wonders if, in the wake of Robert Gerard’s filleting, candidates are hard to find. (One also assumes candidates are being scrutinised far more closely by Treasury.) The vital question is: who is in the hot seat when Governor Glenn Stevens is overseas, ill or (heaven forbid) under the proverbial bus? That is the question Trounson did not answer and we shall check with the RBA and report back.

Read more at Henry Thornton.

Peter Fray

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