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RBA should lift interest rates but it won't

By Henry Thornton - posted Tuesday, 7 September 2010

The Reserve Bank should, but almost certainly will not, tighten monetary policy following its board meeting today.

It should tighten now because the Australian economy is strengthening quicker than it - or other analysts for that matter - believed likely.

It will almost certainly not tighten now because of uncertainties in the global economy, a mistaken belief that domestic inflation will remain in its target zone and because it has not prepared its support base for the next rate hike.


The global economy has been grappling with risks, as well as endemic uncertainty, all this year. There have been sovereign debt alarms, double-dip recession fears and China slowdown worries.

The US Labour Department reported on Friday that companies created only 67,000 new jobs in August. That's down from the 107,000 they created in July. And because the government laid off temporary Census workers, the economy as a whole lost 54,000 jobs.

Americans are now discussing the "great jobs recession". Unemployment is stuck a shade below 10 per cent, and 25 million Americans are out of work, with many more under-employed. Consumer and business confidence is low, and the policy debate is gridlocked between expansionists who want far more dramatic stimulus packages and conservatives who say the budget deficits and prospective deficits now projected are far too big and should be slashed.

US Federal Reserve chief Ben Bernanke sparked a bounce in stock prices when he told us that he would do whatever it took to promote recovery. What effectively the Fed can do must be questioned. It was Keynes, or Uncle Tom Cobbley, who said it was possible to bring a horse to water, but not to make it drink.

That is why monetary policy, as easy as it technically can be, is replaced in the Keynesian canon by fiscal expansion when monetary policy reaches the point at which it becomes like "pushing on a string".

But fiscal expansion, if pushed too far, becomes like pushing on a strand of soggy spaghetti. The US has probably reached this stage and must of necessity await the natural healing that time will bring, together with the native entrepreneurial get up and go of the American people.


Greece, Portugal, Spain and even Britain were in the vanguard of euro-zone nations where global investors saw a serious chance of sovereign debt default. The hardships imposed on the Greek people, and those of other profligate peoples, was not the main concern to those who worried about sovereign debt default. Mostly it was the fear that euro-zone banks would fail, leading to another severe global credit freeze.

Tough fiscal policies have been imposed in Britain and to varying extents in other high-deficit nations. In its conclusion to a major survey, released on September 1, the IMF says: “What is needed in these challenging times for fiscal policy is a steady hand, not erratic changes, a steady hand to sustain the adjustment over time and reverse the long-term fiscal trends that are currently not sustainable.

“The current environment of low interest rates, which has so far kept debt service payments under control in G-7 economies, despite surging deficits and debt levels, provides a window of opportunity to set the adjustment process in motion. Once interest rates start to rise, the adjustment will become even more challenging.”

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First published in The Australian on September 7, 2010.

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About the Author

Henry Thornton (1760-1815) was a banker, M.P., Philanthropist, and a leading figure in the influential group of Evangelicals that was known as the Clapham set. His column is provided by the writers at

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