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Reserve should lie low and keep its powder dry

By Henry Thornton - posted Tuesday, 4 September 2012

The board of the Reserve Bank should confine itself to thinking and talking today, as there is no case to alter the stance of monetary policy.

We shall outline the questions board members will (or should) ask, and the points that should be made by officials in response. The overall point is that, while there are plenty of problems, none of them would be helped by a change in monetary policy at this time.

Q. What is happening in Europe?


A. The eurozone crisis stumbles on. Clearly there is a concerted effort to keep the eurozone intact, even keeping Greece in the single currency area that it is so unsuited to. Countries in as much trouble as Greece - Ireland, Malta, Portugal and Spain - would benefit from far lower currencies, and generating recovery with an uncompetitive currency for these weaker nations is far more difficult than it need be.

Politics aside, those striving to save the eurozone must fear a serious banking crisis if the weak nations took the lower currency road to recovery, leading to the break-up of the eurozone.

Q. How bad is the China slowdown?

A. Our view is still that the slowdown is mild and will create no great problems for Australia. There are others with a bleaker picture. For example, our favourite critic, Henry Thornton, has been worrying since January when a leading European journalist drew attention to the large drop in the Baltic Dry Index of freight movement, an indicator that was a favourite of a former member of this board, incidentally.

China's various statistics generally have been worse than expected since then, and the forward price of iron ore is now below $100 a tonne and still falling. This canary in the coalmine is far from dead, but is wobbling on its perch.

Q. Is Ben Bernanke going to print more money and does that matter?


A. Bernanke has been dropping hints that do more to confuse even fellow central bankers than to clarify his true intentions, which may indeed be unclear in his own mind. The US recovery is far slower than seemed likely at the start of the year, and if "Operation Twist" (depressing short bond yields at the cost of raising future dated yields) works at all, the chairman must be tempted to engage in more of the same.

But the US Fed's monetary policy looks like a prime case of pushing on a string. The real issue is US fiscal policy. Confidence will be improved only when one party or the other finds and imposes a policy to give promise of reining in budget deficits in the not-too-distant future without imposing ludicrous austerity in the immediate future. We shall be monitoring the presidential election closely.

Q. All this sounds pretty downbeat, Mr Stevens. Surely another rate cut would do no harm? A. I agree that the risks are more nearly on the downside than on the upside, but I am inclined to wait a bit longer. Let's come back to the question when we have reviewed domestic conditions and prospects.

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This article was first published in The Australian on September 4, 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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