Rate hikes can avert crisis

Those arguing for caution will say that housing is delicately balanced and that higher rates of interest could create serious downward momentum. A major fall in house prices would further weaken consumer confidence and retail buying power.

Business members of the board will observe, to varying degrees, that Australia has failed to invest in necessary infrastructure, there has been insufficient investment in skills, education and training, social welfare is too generous and the multiple layers of government are imposing an onerous burden on business.

One or two may even complain about the burden of taxation and ask in some exasperation why something cannot be done. If someone is feeling especially irritated he (or she) might well ask why this situation has been allowed to develop.

The secretary of the Treasury is likely, at this time, to say Canberra is well aware of all this, but no-one in this room should fool themselves - tighter monetary policy cannot make up for deficiencies in other areas of policy. He may even warn that a recession is likely to seriously reduce the chances of effective reform in the broader arena.

The governor and deputy governor of the RBA (probably supported by Warwick McKibbin) are likely to weigh the risks of an inflationary break out far more highly than Treasury or private business interests. They will almost certainly have approved papers for the board that emphasise this risk and which conclude by recommending another rate rise followed by a period of stability while economic developments are monitored closely.

The relevant monitoring will include assessment of the May federal budget and of the plans for wide-ranging reform of labour markets, improving education and training, reducing business regulation and fixing commonwealth-state relations.

If they are on song, they will point out that all the things that might allow an easier monetary policy than they are advocating - such as a seriously responsible budget - are hypothetical or in the case of serious economic reform, are even more uncertain or at best will take a long time.

The governor should sum up the debate by saying: "What we know now is that monetary policy needs to temporarily reduce overall demand to maintain stability until other policies act to improve the supply side of the Australian economy." If there is no rate rise announced tomorrow you will know that the RBA governor has been rolled. You can also factor in a distinctly greater chance - at least 50 per cent - of an old-fashioned crisis later in the year as the Australian dollar dives and inflation climbs. Even with a rate hike tomorrow, at least two further 25 basis point increases will be needed, although there may well be a pause to allow clear water for the federal budget.