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Hawks to beat the doves by 25 points

By Henry Thornton - posted Tuesday, 3 April 2007

It’s (almost) official - the Reserve Bank "is still undecided as to whether it will lift interest rates next week, according to one of the world's most prominent global economists".

This is the line being peddled by said economist, David Hale. The story was told last week on Lateline, and reported in this newspaper.

Henry wonders what it takes to get a briefing from the RBA. We offer ourself as "one of the world's most prominent virtual economists", and we promise not to spill the beans on Lateline.


The Reserve Bank board meets today, and our task is to provide advice that will help its members make up their minds. We also suggest that the independent members of the board question officials about the practice of providing private briefings to economists from the private sector.

We infer (not having the benefit of any private briefings) there are at least two views among the staff of the Reserve. The natural, conservative, view is to do nothing if at all possible - very likely the view of governor Glenn Stevens.

Then there is the view of chief economist Malcolm Edey, who recently spoke in more radical terms. Henry's translation: let's make sure inflation is properly under control.

"The Bank's inflation forecast, as presented in the Statement on Monetary Policy in early February, was that underlying inflation would decline slightly over the next two years to around 2 per cent. This outlook is still higher than ideal: it implies that inflation is more likely to be too high than too low in the period we can foresee.

"Information that has become available since that forecast was made suggests that some of the factors pushing up underlying inflation last year remain in place. The December quarter national accounts recorded relatively strong growth in demand and output. We also have some additional data on wages, which showed that growth in the Wage Price Index remained around 4 per cent in annual terms at the end of last year.

"This needs to be interpreted carefully, because the September quarter outcome, and hence also the annual figure, were artificially held down by a change to the timing of last year's minimum wage decision. The outcome for the December quarter, which was unaffected by that, was a quarterly increase of 1.1 per cent, which was at the top end of its historical range.


"In summary then, the recent round of data has pointed to relatively strong outcomes for demand, output and wages growth in the December quarter. As always, the Bank will be giving careful consideration to these developments, along with other incoming data, as it continues to review inflation prospects month by month."

Henry guesses that deputy governor Ric Battellino is a hawk. This is his natural bent, and conforms to the traditional role for the deputy governor, especially one whose age makes it likely he will never be governor. He will emphasise the continued strong growth of credit on top of other bullish local economic data.

Private members of the board have a natural tendency to dovishness on monetary policy. This is because their business interests will prosper (at least in the short term) more with easier rather than tighter monetary policy.

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First published in The Australian and on Henry Thornton's website on April 3, 2007

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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

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