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Clear choice for Costello as RBA's dynamic duo jostle for the top job

By Henry Thornton - posted Tuesday, 6 December 2005

RBA board members are more likely to chat about what Santa Claus is bringing than about the complexity of Australia's tax system. More's the pity.

On last week's shenanigans, Henry Thornton favours a Senate committee vetting future board nominees. Adoption of such a well-practised American process would greatly increase the transparency of the appointment process, increase the independence of the Reserve Bank and minimise the chance of an embarrassing repeat of the Gerard affair.

In truth, Santa is still on the board. All over-borrowed Australians should be aware that this is the last Christmas that RBA Governor Ian Macfarlane will be the host. He steps down in September. Interest rates for borrowers have been kept lower than they might have been by jolly Father Ian. But next Christmas, the reins of the RBA sleigh will be in new hands. In our mind, Treasurer Peter Costello (or his successor) has a clear choice.


He can pick Deputy Governor Glenn Stevens, dour and doughty. A tougher cookie than Macfarlane, Stevens seems to have been the chief advocate of pre-emptive action to wind back inflationary pressures. He would be very likely to mark his new territory with a couple of early rate rises, if current wage pressures persist, as we expect.

The other obvious candidate is gifted academic Professor Warwick McKibbin. McKibbin is rightly famed for his practical international policy analysis of trade, capital flows, global warming and SARS. He would presumably relate more naturally to the former Professor Ben Bernanke, the new chairman of the US Federal Reserve Board.

McKibbin's general equilibrium framework tends to suggest that what Australia does in the monetary sphere matters little, so long as our interest rates attract no more than the capital inflows necessary to finance our current account deficit.

In that, he is more like Macfarlane than Stevens, though he would - we feel sure - prefer our inflation rate to be no higher than that of our trading partners.

What happens as we move through 2006 depends not only on who is governor of the bank but also on developments in the rest of the world.

Though there are pockets of spare capacity (especially in Asia and Europe), the world remains on balance an inflationary place.


Gold finally rising through $US500 per ounce is one sign of the pressures that are building. Other commodities are rising in price too, with copper helped along by the spectacular miscalculations of a Chinese currency trader. The welcome recent easing in the price of oil is a contrary indicator, although the main message is surely that dear oil is here to stay.

The American press has been debating whether the US Fed will soon reach the end of its tightening cycle.

"Will Santa Pause visit the Fed?" asks Nouriel Roubini of RGE Monitor. Too soon for a pause, we say. The firm economic data from the US is still fuelling inflationary pressures, as the US Fed under out-going chairman of the Board of Governors, Alan Greenspan ran monetary policy too loose for too long.

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First published in The Australian on December 6, 2005. Also in Henry Thornton

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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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