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RBA grapples with 'dilemmas, ordinary Australians suffer'

By Henry Thornton - posted Tuesday, 5 November 2013

The RBA governor has said he cannot deal with the excessively strong exchange rate, but that eventually falling commodity prices will do the job for him.

With his fellow senior officers, Mr Stevens has has dismissed thoughts of a bubble in housing, but at the top end of some markets, especially Sydney's rich belt, bubble-like signs are evident to rich people, or ordinary people who read newspapers.

Journalists are at last (at last!) discussing the dilemmas that are worrying our friends in the bunker at the top of Martin Place.


With appropriate modesty we point out that our regular column has used the words 'dilemma' or similar quite often in the past year, and also that we have articulated an appropriate way for Glenn Stevens to approach these dilemmas. Here is the evidence.

Our tagline is that 'monetary policy cannot serve two masters', appropriated with attribution from the master monetary economist of the twentieth century, Milton Friedman.

His point is that monetary policy must focus on restraining goods and services inflation and guarding the economy from the ravages of financial instability.

Other objectives need actions other than the subtle movement of interest rates which takes most of the time of central bankers. (What they do after their morning tea is mysterious to most people, which is why central banker do not often invite critics, or even old friends who occasionally offer advice, into the bunker.)

Here is Australia's current position.

The economy is sluggish, though the latest job ads (a highly reliable indicator that has been falling for some time now) may finally be stabilising. Jobs are hard to get and an oversupply of university graduates, and of older, highly experienced workers, is making jobs even harder to get for ordinary Australians.


Inflation is low but may be rising. If there is a big and sudden fall in the value of the Australian dollar, inflation will quickly exceed the RBA's target zone. If our centraql bankers think things are difficult now, imagine double digit inflation with double digit unemployment to follow.

Interest rates may already have gone a bit lower than is wise, partly in the hope of reducing the Australian dollar, which seemed to be working for a time but the RBA has now thrown in the towel.

The trouble is, we have been told, the pesky American central bankers keep deciding not to begin to restore a sensible monetary policy, and the resulting global boom in asset prices is holding the Australian dollar up and may drive it higher again.

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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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