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Better late than never

By Henry Thornton - posted Tuesday, 6 November 2007

Exactly one year ago, Henry called for a 50-basis-point rate hike as a pre-emptive strike against inflation.

Sadly, this advice was ignored and now, according to two commentators (and more will follow), Australia may be facing three 25-basis-point rate hikes. Scott Murdoch and Richard Gluyas said in this newspaper late last week that now there is a risk of "three rapid rate rises". "Too little, too late" in 2006, 2007 and probably also in 2008.

Excessive caution is the main reason. A nation of course needs cautious central bankers, but we are badly served when this tips into timidity and (effectively) lack of faith in the resilience of the nation's economy.


Closely related to overcooked caution is excessive conservatism in forecasting. As the boom gathers pace, the evidence is emerging almost every time a new economic statistic is released. Consider the evidence.

Most importantly, employment growth in Australia has exceeded everyone's expectations, as has the fall in the rate of unemployment. The tendency for the economy to outperform "reasonable" expectations is, in fact, endemic.

Other recent economic statistics underline the point -- the economy is running away from the economic analysts. The quotes below are from "market economists", names suppressed to avoid any unintended slurs.

"Retail trade turnover grew by 0.8 per cent in September, which was stronger than the 0.5 per cent gain markets had expected. For the year to September, retail turnover was up a very healthy 8.2 per cent." As a side comment we must say: "Healthy!? The sentence is OK if you put "un" in front of "healthy", or use the word "unsustainable".

There is more: "Australia's trade deficit widened to $1.862 billion in September, from a revised increase of $1.665 billion in August. This was much higher than the market consensus for a $1.0 billion deficit."

Are readers as tired as Henry is of reading that economic data "exceeded expectations" or is "much higher than the market consensus"?


Do those who form these "expectations" or shape the "consensus" ever stop to reflect on their forecasting record? Do they ever take a stroll in a shopping mall, or think about record growth of household debt and the basis for record bank profits? If Australia were a nuclear reactor the attendants would be heading for the hills after operating the closedown procedures.

Another recent economic story was equally aggravating. "Building approvals jumped 6.8 per cent per cent in September, sharply retracing the 1.8 per cent decline seen in August. This is well above market expectations, which had centred around a 0.7 per cent increase. Total credit provided by the private sector rose by 1.2 per cent in September, following a strong increase of 1.4 per cent in August. The market had been expecting an increase of 1.0 per cent in the month."

The latest report of goods and services inflation shows the same tendency. Goods and service (CPI) inflation was a relatively modest 0.7 per cent for the September quarter and 1.9 per cent over the year. This has led the Treasurer to say the Reserve Bank would be acting against his "contract" with its governor if it raised rates.

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First published in The Australian on November 6, 2007 and on Henry Thornton.

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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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