Aug 03

De ja vu?…and a messy interest rate commentary

Maybe I’m missing a few details and hopefully I’m wrong but I remember in the middle of 2008 the RBA were talking up inflationary concerns due to the China effect, raising and threatening to increase rates despite overseas blow-ups (Bear Stearns, etc). Right now, it has a similar feel, the RBA is once again concerned about inflation whilst Europe is on the brink of blowing up.

Spanish and Italian bond yields are at record highs and unlike Greece, Spain and Portugal they cannot be saved with the likely outcome is another global recession or worse. Anyway, I digress. As aluded to last week, local inflation is not driven by local demand (evidenced by further poor retail data today) and if the Reserve Bank increases rates then they’ll simply be creating a recession in numerous parts of the Australian economy.

Increasing interest rates to create serious problems in numerous parts of the economy is not aligned with the Reserve Bank’s primary role which is …

to “contribute to:

  1. the stability of the currency of Australia;
  2. the maintenance of full employment in Australia; and
  3. the economic prosperity and welfare of the people of Australia.’

Note, their role is not an inflation target, and an interest rate rise today would hardly make an impact on inflation anyway.

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