Time to move: Reserve Bank must get interest rates back to normal soon

China's ongoing boom has helped revive commodity demand and commodity prices. This is the main reason Australia is in much better shape than other developed nations. Australia has three other advantages: its net government debt was near zero when the crisis broke. This provided good scope for fiscal stimulus.

Australia's emergency low interest rates were around 3 per cent rather than zero, and have already been moved back towards normal levels. The caveat here is that the RBA has to decide how to take account of asset inflation and what reforms are needed to better control the banking system.

When the crisis broke, Australia's labour market was flexible. The abolition of WorkChoices and introduction of Labor's Fair Work legislation reintroduces inefficient regulations and rigidity and the effects of this will be unhelpful.

Australia faces a tepid developed-country recovery and a rapid developing-country recovery - the two-speed economy problem. With a re-regulated labour market, the chances of big pay hikes in the fast lane spreading to workers in the slow-lane industries are significant. The nightmare scenario is a combination of domestic inflation from the mining boom and global inflation as governments inflate their way out of fiscal gridlock.

With unemployment falling, business investment rising, house price inflation building and government still throwing money at problems of its own making, the Reserve must get cash rates back to normal ASAP.