So Ken Henry reckons we should be wary of a second dip, the RBA is more optimistic, saying the chances are we won’t, as Governor Glenn Stevens indicated to the House of Reps Economics Committee on Friday and the bank did in its new forecasts for 2009 and 2010.

Now the know-it-alls, Malcolm Turnbull, Joe Hockey and Barnaby Joyce reckon we should shut off the stimulus tap and start cutting back.

They were of course among the noisy bunch of Indian Minahs in the media and the economic commentariat who doubted that the cash splashes would work, labelled them a waste of money and doubted whether we would have enough in reserve if the economy dipped again (Professor Warwick McKibbin a RBA board member was one of the latter).

Now we have this sort of semi-dream world debate suggesting that its all over bar the shouting, so we should haul back, the resumption of the juvenile race to call the first interest rise and no doubt we will soon hear from some wise after the event folk suggesting that we didn’t have to spend a cent.

Now the minutes from the RBA board meeting earlier this month reveal a bit more detail of the debate over the boom/rate rise, or caution/watch for a second dip approach to monetary policy: the optimists still seem to be in Martin Place at the RBA, the pessimists in treasury in Canberra, judging by the speech yesterday by Treasury Secretary Ken Henry and the comments this morning from Treasurer, Wayne Swan.

But the RBA’s board minutes show the extent of the debate (The bold bits are mine). Ken Henry wasn’t at the board meeting, but his chief big picture economist, David Gruen was.

Although some of the recent strength in the domestic economy might be temporary, partly reflecting policy measures, the outlook for domestic spending had improved, given the significant recovery in measures of household and business confidence.

Accordingly, the staff had revised their growth forecasts upwards. The revised forecasts were still for sluggish output performance in the near term, but embodied a strengthening of growth during 2010 and 2011. The latest CPI inflation figures showed that inflation had fallen in underlying terms as expected and further declines were still anticipated.

The recent appreciation of the exchange rate would dampen the effects coming from the earlier depreciation, as well as dampening activity at the margin. But the upward revision to the growth forecasts meant that inflation was not expected to fall as low as previously thought.

Members noted that the cash rate had been reduced to the current very low level in anticipation of very weak economic outcomes.

In recent months, members had left open the possibility of further reductions in the cash rate should further downside risks to the economy emerge.

Given the recent improvement in the global and domestic outlooks, it now appeared unlikely that this would be necessary. In fact, if the economy evolved as anticipated in the forecasts, the Bank would in due course need to adopt a less expansionary policy stance.

In discussing the timing and process of removing some of the current expansionary policy setting, members noted that it would, when it began, involve balancing two risks.

There was a risk of overstaying a very accommodative setting in a recovering economy, particularly when underlying inflation still needed to decline to reach the target. On the other hand, there was a risk of an early tightening choking off confidence and demand prematurely.

A particular source of uncertainty was whether the recent growth in household spending was due mainly to the temporary fiscal measures, in which case it would probably soon fade, a more general decline in risk aversion, or the more persistent effects of lower interest rates. Information over the period ahead would be important in judging this.

Having considered the issues, the Board judged the current stance of monetary policy to be consistent with fostering sustainable growth and low inflation, while leaving adequate flexibility to respond to developments as needed over the period ahead.

The bits in bold indicate where the policy debate is centred on the board, and where the speech yesterday from Dr Henry enters the debate.

Messrs Turnbull, Hockey and Joyce have neglected reading these minutes, or asking questions along these lines. This is why the RBA is not in favour of any easing in stimulus settings, even though it has switched to a rate rise in the future sometime approach, providing there’s no more nasty surprises on the downside, which still can’t be ruled out.

Peter Fray

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