Reserve's good cop/bad cop routine a bit of a cop-out

In our view, the RBA made a bad mistake when it moved in August from its tightening bias to its claim that there was as much chance of rates falling as rising. That sounded over-optimistic, and increasingly it is seen to be.

In the absence of any prospect that fiscal policy will be tightened, restraining this expansion in Australia is again going to have to fall to monetary policy. This is a pity, as the argument in favour of an internationally co-ordinated move to a more stimulative policy stance in Europe and Asia and to a tightened fiscal policy stance in the US applies with equal vigour to Australia. It would be much better if our budget surplus was sharply increased, but realpolitik dictates that tax cuts and extra spending - rather than tax increases or spending cuts - are more likely.

Not that all is lost in Australia. The World Economic Forum has worked out that it is the 8th most competitive economy - a welcome promotion. But that appears the high point. Resource booms destroy non-resource industries - and this one may last longer than most, so sayonara to more of Aussie manufacturing industry, welcome to yet more imported gold-plated taps and plasma screens. And squeezing the solid core of rising inflation and leaning against the monster current account deficit will extract a big toll on the non-resource sectors of the economy.

We see no prospect that the RBA will choose to surprise markets with actual rate moves until those moves have been well telegraphed. Given the massively negative reaction in the press and from the Government to the RBA's last hike in March, that is understandable, if regrettable.

So we expect bad cop, Glenn Stevens, to make the case for an interest rate increase, with the actual move more likely after the mid-November Monetary Policy Statement than before. Does it really matter that this renewal of the tightening cycle is coming a few months late? At the margin, yes. It would be better for the containment of inflation if the first rise came earlier.