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Reserve should resist siren calls for rate cuts

By Henry Thornton - posted Tuesday, 3 April 2012

I do not expect the Reserve Bank to cut interest rates today. Nor should it.

This is no automatic opinion of an inflation hawk. Rather it is the view of someone who has considered and rejected the views of those proposing further rate cuts now.

The strongest view is that the immensely strong mining boom is sucking strength from other industries both by its direct demand for resources and its indirect effects - higher interest rates and a higher exchange rate.


In particular, manufacturing, tourism and education are all suffering from these indirect effects, and if these industries are to play an important role in Australia's future, rate cuts would reduce these side-effects and allow for more balanced economic development.

This is a key argument and deserves careful public debate. Henry debated this argument at length with Mrs Thornton on a long car journey over the weekend. She reminded Henry of the economist's mantra, the theory of "comparative advantage", or "do what you are good at". What a nation is good at is not, sadly, what it is a bit above average at.

We must be the world's best at something for it to qualify as an important part of a nation's economic future in the modern world of largely free trade and open borders.

Mining, agriculture and sport are the three industries at which Australians are clearly world beaters. Fortunately all three look like being highly successful industries for the foreseeable future. Mining will provide resources for the development of the emerging economies of China and India, and many smaller economies. A world of seven billion people rising to nine or 10 billion with its middle classes rising even faster is a world desperate for large quantities of high-quality food.

Sport speaks for itself, and will be showcased at the forthcoming London Olympics. Global sport is rapidly becoming big business, and Australia would be wise to invest strongly in this business.

If forced to nominate another industry for special attention I would nominate medicine. The world of nine or 10 billion older, wealthier people will be a world of greatly increased demand for medical services.


Australia has world-leading medical science and equally fine standards of medical treatment. We would be wise to encourage medical science with far larger grants to medical scientists and facilitate the development of a new export industry to treat Asia's wealthiest ageing people. I have no doubt that money spent in this way would repay Australian taxpayers far more handsomely than handouts to car manufacturers.

Another argument is that Australian consumers have begun to save after decades of enthusiastic spending. Reducing interest rates will restore spending, and protect and enhance the profits of retailers. But Australians have again begun to save because they recognise that saving will increase their families' independence in an uncertain world. And saving more now will enable people's consumption to grow faster when they are older, which will allow for a more even spread of lifetime consumption.

Translated to the macro-economic sphere, Australians saving more will allow the nation to grow faster by investing more of its own money funding the mining, agricultural, sporting and medical booms that will define our successful future.

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This article was first published in The Australian  on April 3, 2012.

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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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