RBA board faces a number of dilemmas today

The Reserve Bank board, meeting today, faces a number of dilemmas. Uncertainties are likely to mean the board will keep interest rates unchanged but there is a powerful underlying reason to keep raising rates.

It will not be evident for a year or so whether or not decisions this year (both rate hikes so far and decisions to be made today and in coming months) are correct.

That is always the case but now the currents in global and domestic economies are especially difficult to interpret. The underlying threat is inflation.

Internationally, equity markets have corrected downward but with days of wild optimism amid the general gloom, meaning volatility is high.

The potential failure of Greece to honour its debts has created uncertainty about the future of the euro-zone economic grouping and the European Monetary Union.

The weak nations of southern Europe would benefit from currency depreciation but remain locked into the EMU straitjacket.

A breakdown of the currency in the EMU is feared because money flows from nations such as Greece and other highly indebted euro-zone nations would put many banks at risk of default.

This is the first dilemma the RBA board will face today.

It is not, of course, a matter for any decision by the board, but rather a question of what is likely to happen and what different outcomes might mean for the global recovery.

The second global dilemma concerns the state of the Chinese and US economies.

Recent talks have elicited hope that China may abandon its close link with the US dollar.

Ideally, of course, China would float its currency and buttress its planned move from export-led growth to a more balanced situation with the help of a stronger currency.