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Europe's deal gives RBA good reason to sit tight

By Henry Thornton - posted Tuesday, 3 July 2012


The Reserve Bank board said after its meeting last month that the arguments had been finely balanced.

"Recent domestic data generally had not suggested a significant weakening in conditions compared with the forecasts a month earlier," it said. Inflation was low and was expected to remain near the bottom of the target zone.

And, in any case, there had not been time to assess the effects of earlier cash-rate reductions.

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The big worry was "clear evidence suggesting a softening in global conditions", and increased uncertainty about the future in Europe, with the possibility of increased "precautionary behaviour" here.

Now Europe has reached some sensible compromises, providing hope there will be more in due course.

The domestic situation has not weakened, employment has been strong and, indeed, increased export volumes have offset weaker commodity prices.

If ever there is an iron-clad case for the RBA to sit tight, with monetary policy on the easy side of neutral, today presents such a case.

Events in the eurozone have been dramatic, with plenty of good judges suggesting disaster was a real possibility.

Germany and a few other northern nations are growing and seem on top of their economic challenges, but the Club Med nations are in deep recession with unsustainable national debt mountains, in most cases piled on top of equally damaging Everests of private debt.

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Five such nations have asked for help to rescue their banks, and others may join that queue soon.

Germany, which will eventually be forced to lead the rescue of the weak nations, or abandon them, faces great dilemmas.

Germany's instinct is not to bail out weak nations and weak banks, including its own, without imposing strict conditions that will include budgetary austerity and microeconomic reform.

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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 www.henrythornton.com.

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