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Brace for rate hike - unless ...

By Henry Thornton - posted Tuesday, 7 August 2007


The Reserve Bank has clearly prepped the market to expect the need for a rate hike this month. This is clear from the comments of “well informed” journalists, and most of the bank economists. “The Reserve hates surprises” one such guru said on weekend television.

Another tactical case for a rate hike this month - accepting that the strategic case has been clear for some time - is that it provides the greatest possible time before the Federal election.

RBA governor Glenn Stevens has made it clear he is quite capable of delivering a rate hike in an election year, unlike (according to those who check these matters) all of his predecessors. Still, hiking a month or so before the election is called might be seen as unduly aggressive, biting hard the hands that appointed him.

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So on balance readers should expect a rate hike to be announced tomorrow. The main caveat is that two more very bad nights on Wall Street would provide a valid reason to wait and see. This is because two more very bad nights would begin to suggest the possibility of a major change of direction for global markets, well beyond the “correction in a bull market” currently on the cards.

Having waited in August, the balance would have to swing again to allow a September hike and by October the election would be announced - precluding any monetary policy change - or be so close as to effectively preclude such action.

The market has been “prepped”, the governor is no doubt prepped for action and biased against the tag of lacking ticker or consistency that might become his if he waits now and has to go later.

Expect a hike, and if there is no hike you will know that the Reserve is worried, perhaps very worried, about the global economy and its prospects.

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An edited version was first published in The Australian and this version on Henry Thornton’s website on August 7, 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 www.henrythornton.com.

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