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Low inflation gives the Reserve Bank reason to pause

By Henry Thornton - posted Tuesday, 1 February 2011

Consumer inflation for the December quarter surprised just about everyone, including Henry, and gives the Reserve Bank a reason to delay the necessary monetary policy tightening.

Much of today's board meeting should be devoted to understanding what is going on with goods and services inflation both globally and in Australia.

Part of this discussion will be devoted to what Australia's low December figure means for the bank staff's forecast for inflation. The effect of the dramatic summer floods in eastern Australia will also be discussed. The Treasurer has already said the floods will detract 0.5 per cent from GDP growth and add 0.25 per cent to inflation in the current financial year.


The real impact will come in 2011-12, however. This is when the renewed resources boom will be hitting its stride and there will be considerable pressure on inflation. It is also when the rebuilding and refurbishment in the vast flooded areas of eastern Australia will be at their height.

The National Broadband Network rollout will presumably also be adding to demand for skilled labour. We have been told there are massive delays in the granting of 457 visas as traditional working class protectionism returns under a Labor government.

Global inflation is also on the rise. This is most noticeable in China, India, Indonesia, Brazil and other developing nations. Goods and services inflation in the US and euro-zone nations is held down by unemployment at 10 per cent or higher, while budget deficits and loose monetary policy are creating the preconditions for serious inflation once recovery gathers pace.

The Reserve's board has to decide whether a low December quarter's inflation is due to some previously undetected deflationary offset to global inflation, domestic resources boom, NBN rollout, and flood repairs. With lags of 12 to 18 months for inflation to respond to monetary policy, it might be rational, on the balance of probabilities, to decide to continue tightening of monetary policy.

Australia's sensation-seeking press has already described Glenn Stevens as "useless" (The Daily Telegraph, April 5, 2008), and he and the RBA board would be brave indeed to raise interest rates today. Having stubbed his toe on the downside of a two-speed economy, Stevens is likely to hit his head on the effects of the upside in 12 to 18 months' time.

Global monetary policy needs reform


ALMOST 70 years after the post-war Bretton Woods conference that endorsed the US dollar as the de facto global currency, America's severe economic problems coincide with China's rise.

US monetary policy became extremely easy under Fed chairman Alan Greenspan and the result was a bubble in American shares and then house prices.

In the wake of the global financial crisis of 2007-08, Greenspan's successor, Ben Bernanke, has again created highly expansionary monetary policy, with cash rates almost zero and two doses of "quantitative easing", a fancy name for printing money. It is my belief that China has studied the history of capitalism, and in particular the history of boom and bust in asset prices, far more closely than senior Americans.

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This article was first published in The Australian on February 1, 2011.

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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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