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Reserve Bank must slow down with the changes

By Henry Thornton - posted Tuesday, 3 March 2009

The Reserve Bank tightened monetary policy far too slowly in the boom. By allowing the economy to build excessive momentum, including inflationary pressure, this led it to tighten too far.

When the seriousness of the global financial crisis became clear, the Reserve eased dramatically quickly - with 400 basis points of rate cuts in six months.

Is the speed of the easing due only to the speed and extent of incoming bad news or does it represent the lessons of the boom? Only time will tell, but clearly rapid easing was required and has been provided.


Most of Australia's "well connected" journalists say a pause in the easing is the likely outcome of today's meeting of the board of the Reserve, while apparently there are others who say another 100 basis point cut is on the cards.

Henry buys the "pause" story, based as it is on logic and common sense. There has been a lot of both monetary and fiscal easing for the economy to absorb.

Not surprisingly to experienced observers, Australia's recent economic statistics are surprising on the upside. The economy was growing strongly when the global crisis hit and momentum works for economies as well as sporting teams.

The Australian dollar has fallen a good deal, encouraging exports and local production while discouraging imports.

A halving of mortgage rates, reinforced by various fiscal handouts, including substantial amounts for first-home buyers, has removed the worst of the gloom from the housing industry.

Substantial cash handouts boosted consumption in December and the Rudd Government will be splashing more cash around about now and, presumably, in the May budget.


Banks have, however, been less generous in their lending to business and, despite the general perception that Australia's banks are in relatively good shape, their managements are playing safe.

Bankers are using every excuse to re-price loan rates upwards, and even sound businesses are finding loans hard to get.

Business confidence is low, but in the December quarter business investment rose, perhaps illustrating momentum at work.

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First published in The Australian on March 3, 2009.

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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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