The Reserve Bank needs to start being accountable for its decisions

But it is the third episode, since the start of 2001 that has brought us to the current dilemma. The actual rate has been held well below the "neutral" rate, stimulating the Australian appetite for debt and speculation, for so long that there is now a threat to financial system stability if it continues. This is the vital point. Maintaining stability of the financial system is as important a responsibility of the RBA as controlling inflation. And the main consequence of easy money since 2001 has been the excessive growth of credit and the associated explosion of household debt. Together with the resulting powerful rise in house prices, unsustainable growth of household demand and the blowout of the current account deficit, these developments are a threat to financial stability.

We suggest the RBA Governor table this graph with his opening statement to the House of Representatives Standing Committee on Economics, Finance and Public Administration in Brisbane next Monday. He can then make the case crystal clear, that a series of rate rises is in prospect, first to withdraw the present level of stimulus in the monetary stance and subsequently to actually impose some restraint on excessive domestic demand growth. But at the same time he can take away the fear that there will be a repetition of the mistake made in the late-1980s.

He must explain that he is acting to protect the stability of Australia's financial system. And, as he has already done, he must also warn that, once the current rise in the Australian dollar has run its course, the pace of domestic (non-tradeable) inflation (currently four per cent per annum) will dominate the headline inflation rate. Of course he should say there is some uncertainty: for instance, if the global recovery continues at its current stronger-than-expected pace, we must expect additional upward pressure on interest rates.

The truth will hurt, unavoidably. The Governor can hardly avoid saying that how much additional restraint will be required will also depend on the way Canberra itself pulls its own policy levers. If fiscal policy is conducted responsibly, perhaps the RBA need only hike rates an additional half to one per cent over the "neutral" rate, implying a cash rate of six to six and a half per cent at the peak of the current tightening.

But if there is the usual pre-election looting of the Budget surplus, the increase in interest rates through 2004 and into 2005 will have to be greater. The signs are ominous, with spending already promised to secure passage of Medicare and education reforms and fiscal drag likely to be returned in the form of tax cuts.

The government knows the independent RBA has to, and will, act, and it will criticise the Bank from the sidelines to grab whatever political advantage there is to be gained. Life will always be tough for an independent central bank properly discharging its duties.