Tuesday, October 05, 2010

It's now more than inflation

I know things are changing fast. But it's wise to keep up.

Here's the presenter of AM this morning:

"The thing that stikes me is that inflation is the key to interest rate rises."

That was the case. Until the Reserve Bank adopted a new mandate on Thursday.

Christopher Joye blogged about it while I was away down the coast:

Yesterday the RBA announced that it had signed a new Statement with the Treasurer. And it was gratifying to see that the RBA had agreed the changes I proposed. In particular, the RBA inserted 337 new words affirming its responsibility for managing the economy’s financial stability. These included the following:

“The stability of the financial system is critical to a stable macroeconomic environment… Without compromising the price stability objective, the Reserve Bank seeks to use its powers where appropriate to promote the stability of the Australian financial system. It does this in several ways, including through its central position in the financial system and its role in managing and providing liquidity to the system…”

The most critical words are those bolded above. Effectively the RBA has now agreed with the Government that it can use whatever ‘powers’ it deems appropriate to ‘promote the stability of the Australian financial system.’ This means the RBA now has, for the first time, an explicitly-agreed mandate to use monetary policy to respond to innovations in asset price and credit growth that threaten the integrity of the banking system and the wider economy.

There's now more to it than inflation. If necessary the Reserve Bank will push up rates even if high inflation is not in prospect.

Take note.

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