It's the best of times, but the party's peaked

It would be too much to expect our central bank to be moving interest rates yet. For a start, it is most un-Australian to try to spoil a party.

And what a party we are having.

Inflation at 2.5 per cent in the June quarter was firmly in the middle of the Reserve Bank's target range, export prices are rocketing, equity markets are booming, housing markets are still rising fast in resource states and may be recovering elsewhere, bond yields have remained low, the currency hasn't collapsed and the new era of economic reform has arrived with a Coalition majority in the Senate.

Internationally, good news far outweighs bad news. The US is showing firm growth with low inflation. China is still booming. India is following closely. Japan's long-delayed recovery is sputtering into life again. Russia, Brazil, and even Argentina are growing strongly.

To be sure, Euroland is growing only slowly and spasmodically, but we are used to that.

We cannot ignore Australia's new prominence in the global pecking order. The Prime Minister has been travelling the world, advising President Bush, supporting Prime Minister Blair at a time of national trauma and visiting the troops in Baghdad.

It turns out we have been playing a key role in creating a new group to fight global pollution and climate change. Even the Association of South-East Asian Nations has decided we may join their councils.

Almost certainly it doesn't get any better than this, and all the good news is probably priced into Australian assets - equities, house prices and the Aussie dollar.

Only bad news and downward revisions to expectations lie ahead. The deterioration in the outlook is creeping up while we bask in the economic sunshine. We firmly believe that interest rates should have been higher earlier, and as a result rates might by now be coming down.

In reality - rather than in our dreamtime - it is going to be very hard for even a pre-emptive central bank to act, to raise rates before the inflation genie has done its damage. Instead, waiting until we can all see the threat - when it is by then far too late - will be the outcome. This is how hubris leads to nemesis.

Short-term interest rates at 5.5 per cent are simply too low in a world of 3 per cent goods and services price inflation and asset price inflation many times that.

US cash rates are also too low at 3.25 per cent, but at least the US Fed has signalled clearly that it will keep removing monetary ease at a steady rate of 0.25 per cent every six weeks, and this schedule is more likely to be extended than terminated shortly.