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Reserve should hold rates - for now

By Henry Thornton - posted Tuesday, 1 September 2009

It’s never as bad as it seems when it's bad, and it's never as good as it seems when it's good.

This should be the mantra of any serious economy watcher, forecaster or central banker with the task of restraining inflation.

It should be firmly in the minds of members of the Reserve Bank board when it meets today.


When the world economy was apparently falling apart about as fast as it was at the start of the Great Depression, some measure of alarm was excusable.

In the major developed nations, and in Canberra, "panic" is not too strong a word for policy action last year and early this.

Globally, massive fiscal stimulus was the result, with monetary policy eased to a point where nominal rates of interest were practically zero, "real" (that is, inflation-adjusted) cash rates were negative and money was being printed and disbursed - so-called "quantitative easing".

The Reserve Bank of Australia, relative to the major nation central banks, cannot be accused of panicking.

Its large cuts in cash rates over a short period showed a welcome bias for action after the relatively timid rate hikes - too little, too late - during the boom.

Now RBA governor Glenn Stevens has said cash rates are at "emergency" levels and will need to be raised as the economy recovers.


So the question is when to start returning rates to more normal levels and how fast to do this.

My advice, with apologies to Treasury head Ken Henry, is: go early, go hard, go rates, as in rate hikes.

But while this is the desirable general approach, what is implied by the point that it's never as good as it seems when it's good?

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First published in The Australian on September 1, 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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