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July 1st 2008


Statement by Glenn Stevens, Governor Monetary Policy RBA

'Inflation in Australia has been high over the past year in an environment of limited spare capacity and earlier strong growth in demand.'





Inflation hasn't been high at all. Anything less than 5% is not high.




When you look at the most recent consumer price statistics, the component that rose the most in the last quarter was the cost of money. The RBA is a significant contributor to the inflation it's trying to dampen. 




Much of the increase in prices is due to global demand. There is nothing Stevens can do to lower the price of oil, wheat or rice. Putting up interest rates isn't going to do it. It just punishes the innocent.


I'm not responsible for putting up the price of oil, iron ore, cutlets or bread. I don't need to be punished twice for something I'm not responsible for.




Some of the inflation is driven by companies like BHP, slugging the rest of the world rapacious fees for Australian iron ore. It's a tug of war between Stevens and Koppers that's being played out in the western suburbs.


Whilst Stevens uses the sledge-hammer of interest rates to bully the sans-culottes out of their homes in Liverpool and Broadmeadows, he's not game enough to take the gloves down to Lonsdale St and have it out with Koppers.




There's plenty of spare capacity; if you want to know where it is, just walk around a shopping centre at lunch time on Centrelink Thursdays.

'The evidence is that the tightening in financial conditions, in conjunction with other factors including rising fuel costs, is working to restrain demand.'


This is RBA-speak for 'ignore everything we've been saying over the last 12 months.'  It's acknowledging for the first time that the market has the ability to dampen demand without putting up interest rates.


Which means that we didn't need to have the interest rate rises we had to have in the first place. They were based on a false premise. Heads should roll!


The drover's dog knows that unless there is a dramatic increase in the wages of mug salary earners that is not related to increases in productivity, as the prices of some goods and services go up, demand for a whole range of goods and services goes down. It's a natural economic phenomenon, the children's equivalent of which is found in every playground. (Tough luck if you produce the goods and services that people are cutting back on.)


Once the seesaw gets into motion, it seeks its own natural equilibrium. The RBA doesn't have to put up the price of money as well.


Of course the latest statement by the Guvner of the RBA introduces a new twist to the inflation-dampening saga. He can always get his fellow RBA Board Member and mate Roger Corbett to put the price of petrol up, saving us all from another interest rate rise. It looks better for Stevens, (though not for Swan and Rudd) if Woolworths put up the price of petrol rather than the RBA raising the price of money.


Heaven knows what will happen when Gerry Harvey and Trevor O'Hoy get on the Board.


Reserve Bank overkill, coupled with a global downturn is threatening to rip the heart out of the Australian economy. The effect of the rising dollar is sending more and more manufacturing jobs off to China.


Very soon the RBA will have to do what the Reserve Bank of America did earlier in the year and drop interest rates dramatically to prevent the collapse of the economy.


The Reserve Bank axe is indeed 'working to restrain demand', indiscriminately; it chops off more innocent heads than guilty. Interest rate manipulation is a blunt, limp and useless tool for managing an economy. You need a scalpel, not an axe.

It's time the Government brought the economic management functions of the RBA back to Parkes and sent Stevens off on Wombat leave.

Don't ask what the RBA can do for you.

It's bunkum.



Frank Blunt


PS   Just wait a couple of weeks until people start spending the extra money that's in their pay packets courtesy the Rod Laver Government. It won't take long for it all to end up in the black hole outside 65 Martin Place.