RBA board faces a number of dilemmas today

Under the Labor government's industrial relations rollback, it is now more difficult to sack non-performing workers, already providing a depressive influence on jobs growth.

If reports of a major attempt to reverse what is a widespread move for workers to become independent contractors are true, there will be a hiring strike to match the potential capital strike.

Slowing activity on top of these actual or potential government-induced drag on employment would lead to the labour market quickly deteriorating.

Now we come to the item of most direct importance to the RBA board: inflation indicators.

As already noted, share-price inflation has been reduced to deflation by various global concerns and house-price inflation in Australia has exceeded that in China, where "bubble" is the usual description.

As we have argued previously, house-price inflation is not entirely the fault of the RBA, but it is a factor in interest-rate decisions.

This month, one might make the case that house-price inflation is roughly offset by share-price deflation, certainly that is the tendency. The unambiguous case for continued interest-rate increases is that goods-and-services inflation has exceeded the general expectation and the forecasts of RBA staff. This in turn is due to activity growing faster than predicted and the board has to decide whether or not the new deflationary forces are sufficient to offset inflation in excess of previous forecasts.

Only yesterday we learned that in the 12 months to May, the TD Securities-Melbourne Institute Monthly Goods and Services Inflation measure rose by 3.7 per cent, the fastest pace since October 2008, smashing through the upper limit of the RBA's 2 per cent to 3 per cent inflation target range.

This measure of inflation is well above the target band even if the effect of the "one-off" tobacco tax is excluded.

The dilemma for the board is whether prospective slowing due to adverse recent events is sufficient to offset recent momentum in an inflationary direction.

The news in the past month is mostly grim and this will generate much debate at this month's meeting of the board.

Australia's cash rate is now close to the neutral zone, and market rates may be a bit above neutral, given increased margins.

I expect there will be an "on balance" decision to hold rates where they are.

In the analysis, the board would be wise to maintain the current bias to tightening.

If Europe survives the present crisis, if US jobs begin again to rise, if China manufactures a slowdown of activity to a "modest" 10 per cent annual rate and if the Rudd government makes peace with the mining industry, soon there will be a strong case for further anti-inflationary policy tightening.