Rate rise scratched - RBA Board on Cup Day, 2005

In addition, the schism between the “let consenting adults decide what they spend and suffer the consequences” approach of Alan Greenspan and Ian Macfarlane and the conventional wisdom that current account imbalances must be closed willy nilly has been starkly highlighted by the hike in interest rates to 7.0 per cent in New Zealand. Dr Alan Bollard of the Reserve Bank of New Zealand has taken the authoritarian approach that Kiwi spending on houses and imports is unsustainable and must be curtailed.

Not all the news is bad, though. Perhaps the best, beyond the realisation that the US has cloned a virtual Ian Macfarlane as its central bank governor, is the continuing signs of recovery in Japan, where only inflation refuses to show its head. Further afield, the news has also improved, with Germany finally sounding as though it wants to get to work.

The rise in bond yields, which has seen US equities begin to fall from over-inflated levels, will gradually cut into US economic growth, but it will be a great victory for Alan Greenspan and for international policy coordination if the US slowdown is offset by Japanese and European recovery.

China - as ever - is still booming, disappointing the pessimists who can’t wait to see it fall over. China even seems likely to pay more for its iron ore imports next year while it continues to charge less for its exports.

So the sun still shines a bit on the RBA Board’s track. Once again, today, the RBA Board can metaphorically go to the races. We see no prospect that the RBA will choose to surprise markets tomorrow. Rate moves in future will be well telegraphed.

The November statement next week will be just one stepping stone on that path. The governor is addressing Australian Business Economists on December 13 and the recent developments suggest he should be giving business economists an early Christmas present on his revised thinking. We suggest he focus on how quickly US rates are catching up with Australian rates, and trace through the depressing consequences for the Australian dollar, which takes away the excuse to hold rates below normal Down Under.

There needs to be plenty of jawboning before the year is out, in order that the rate rise in February or March is virtually a yawn. The RBA will want to avoid at all costs the public and political outrage that followed its essential, but perhaps inadequately telegraphed, move in March of 2005 to hike rates by 25bp.

Source: www.henrythornton.com from RBA data.