Wednesday, February 06, 2008

The Bank's brutal message: It will hurt

There will be another interest rate hike and it will hurt. If it doesn’t, there will be yet another.

That’s the brutal message delivered by the Reserve Bank in its statement announcing this morning’s rate rise, a statement that indicates that any concerns raised at yesterday’s board meeting about the damage that might be done to Australia’s economy by a continuous series of quarterly rate rises failed to win the day.

Put starkly, something far more important than the health of the Australian economy is at stake in the mind of the Reserve Bank right now.

It is whether it loses its battle against inflation. The outlook is disastrous, and the Bank says so...

The Melbourne Institute’s privately-calculated measure of inflation is approaching 4 per cent - way above the Bank’s target of 2 to 3 per cent.

The Bank says in its statement that it expects inflation to “remain relatively high and probably rise further” this year and to only “moderate somewhat” during 2009.

In such a circumstance it will “continue to evaluate whether the stance of policy will be sufficiently restrictive to return inflation to the 2 to 3 per cent target.”

Stripped of what is only a very thin veneer of bankers’ language the Bank is saying that it is by no means sure it has yet done enough to bring inflation down.

It is prepared to whack rates up again and again until it hurts us enough to dent our spending, dent our borrowing, dent economic growth and dent inflation.

No wonder the Prime Minister is unable to offer any reassurance that today’s rate hike will be the last.

The real wonder is that the previous Prime Minister felt able to campaign on the slogan “Go for Growth” in the election when he must have known that was the last thing his advisors in the Reserve Bank wanted.

Today’s statement says explicitly that the Reserve Bank wants a “significant slowing” in growth.

It will cause pain and it will almost certainly push more Australians out of work.

How much pain and how much extra unemployment depend on what’s needed to get inflation back into the Reserve Bank’s target band.

Its up to us. If we keep borrowing and keep bidding up prices there will be even more pain.

The Reserve Bank salvaged just one good thing from the wreckage of the early 1990’s recession - a stable inflation rate of 2 to 3 per cent.

It has no intention of giving it up, and its statement signals that it’s not too concerned about who it hurts along the way.

Note: The Bank's 70-page Quarterly Statement containing its updated forecasts and detailed thoughts will be released on Monday.