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International uncertainties and domestic risks suggest a need to cut by 25 basis points

By Henry Thornton - posted Tuesday, 1 May 2012

Virtually everyone who follows these matters expects the Reserve Bank to cut interest rates today, with some predicting (or calling for) a cut of 50 basis points.

Inflation is low, non-mining activity is weak and the government has promised a substantial fiscal tightening.

Internationally, the China boom is slowing, the US recovery may be fading and the eurozone is in recession with the continued possibility of a disorderly break-up of the single currency union.


A cut of either 25 of 50 basis points would be acceptable, but this writer leans to the lesser cut for reasons to be explained.

The key aspect of the domestic economy is that a massive investment boom is under way.

Mostly this is private investment in great mining projects, but government-funded infrastructure spending is also crucial if Australia is to take maximum advantage of the mining boom.

Sadly, the need to restore fiscal stability and advertise clearly that actions to achieve this are being followed, seems likely to impose on us all a sharp fiscal tightening.

This would have been avoided if more restraint had been maintained during the crisis and especially if stimulus had consisted of spending or other reforms to raise productivity instead of wasteful "Keynesian" stimulus, almost on a par with digging holes and filling them in again.

Achieving even a modest surplus when tax receipts are low and the budget deficit is still expanding will involve cutting spending in a number of areas, including highly desirable spending on infrastructure, defence and welfare.


There will also, it seems, be an extension of means tests and other actual or covert tax hikes, the net effect of which will be to reduce incentives to work hard and to innovate.

The RBA's clear mandate is to keep goods and services inflation under control while maintaining overall financial stability.

The very low "headline" inflation for the March quarter included some one-off price falls, including fruit and vegetables.

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This article was published in today's The Australian.

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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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