Like what you've read?

On Line Opinion is the only Australian site where you get all sides of the story. We don't
charge, but we need your support. Here�s how you can help.

  • Advertise

    We have a monthly audience of 70,000 and advertising packages from $200 a month.

  • Volunteer

    We always need commissioning editors and sub-editors.

  • Contribute

    Got something to say? Submit an essay.

 The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
On Line Opinion logo ON LINE OPINION - Australia's e-journal of social and political debate


On Line Opinion is a not-for-profit publication and relies on the generosity of its sponsors, editors and contributors. If you would like to help, contact us.


RSS 2.0

The case for a pre-emptive strike

By Henry Thornton - posted Tuesday, 7 November 2006

"Too little, too late" is Henry's considered view about monetary policy in Australia. This view seems to be catching on more widely, with market participants saying this month's rate-hike is "virtually certain", and increasing the odds on at least one more hike next February.

As a famous central banker, the late Austin Holmes used to say of such adjustments: these folks are "stumbling reluctantly toward the truth".

There are mixed signals from the real economy, as we shall discuss. But the key point is that "core", or "underlying", inflation is rising steadily and reached the top of the target range in the September quarter. Unless this trend is reversed, Australia's hard-won reputation as a low-inflation economy will be put at risk. Indeed, it already is.


There is a strong case for a pre-emptive rise in cash rates of 50 basis points. This might just jolt inflation expectations back into the zone of relative stability, and thus protect a fundamental pillar of the strong economic prosperity enjoyed by Australians for the past 15 years.

The more likely outcome of today's meeting of the Reserve Bank board is the widely expected 25 basis-point hike. The risk is, that decision would not have much effect in curbing inflation, meaning more debate and further rate hikes well into 2007.

The political fallout from this would be ugly. Although the Reserve Bank board should, of course, ignore such a matter, Henry and his readers in Canberra need not.

The global economy has experienced offsetting forces in the past month. In summary, the US economy has weakened while the Chinese boom has possibly strengthened. The net effect is that the price of oil has fallen substantially, reducing one of the main risks to continued strong global growth.

There is in fact concern at the highest levels of international policy-makers over China's ability to contain its boom, and continued double-digit Chinese growth will ignite inflation there. Chinese inflation would reverse the great global force of Chinese deflation, removing a powerful anti-inflationary force from the global economy.

The world has also, quite suddenly it seems, realised that global warming is a massive threat to continued growth and that adjustment to a more sustainable future economic path must begin soon, or it could be very painful. Despite the fall in oil prices (which might, in part, be a response to lesser perceived geopolitical threats), the overall situation in the Middle East remains parlous.


So the global background continues to feature strong growth, but with more of an inflationary bias than we have seen for the past 15 years.

Australia has experienced mixed economic trends. There is the distress felt by farmers as the worst drought in a century or more tightens its grip. Retail sales seem to be slowing, suggesting that, on average, households are tightening their belts, and the poorer members of society are hardest hit. But overall credit growth is still far too high, especially growth of credit-card debt.

Employment growth remains strong, and casts into doubt the relatively subdued growth of real GDP.

  1. Pages:
  2. Page 1
  3. 2
  4. All

First published in The Australian on November 7, 2006 as 'Inflation risk demands big rate rise' and on Henry Thornton's website.

Discuss in our Forums

See what other readers are saying about this article!

Click here to read & post comments.

2 posts so far.

Share this:
reddit this reddit thisbookmark with Del.icio.usdigg thisseed newsvineSeed NewsvineStumbleUpon StumbleUponsubmit to propellerkwoff it

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

Other articles by this Author

All articles by Henry Thornton

Creative Commons LicenseThis work is licensed under a Creative Commons License.

Photo of Henry Thornton
Article Tools
Comment 2 comments
Print Printable version
Subscribe Subscribe
Email Email a friend

About Us Search Discuss Feedback Legals Privacy