They don't come much more impassioned, opinionated, and bullish than ICAP's Adam Carr, who is always good value as a daily read. Adam and I have been on mostly similar pages over the last year, give or take a data release here or there. I very much agree with this logic, and, I suspect, quite a number (but not all) folks inside the RBA do too. For my close readers, you will recall my asymmetric response function arguments last year (ie, they would prefer inflation to undershoot rather than overshoot, especially given the RBA's poor track-record over the last 10yrs), which Terry McCrann endorsed and helped anticipate the November hike, albeit one month early. Here is Adam today:
"Well having increased by 5% in 2010, the IMF predict that global growth will lift about 4.5% in both 2011 and 2012 (very strong and unchanged from their last update in January). The reality is that in the absence of any major downside risks the upside risks to growth and inflation are material. That’s because as the IMF point out themselves, monetary policy is very stimulatory and fiscal policies are “appreciably more accommodative than before the crisis.”
For the RBA, any talk about a cautious consumer and the like should really be irrelevant. Policy isn’t about where we’ve been or even where we are at...policy should be set according to where we are going and I just don’t think the RBA is as relaxed as market pricing would suggest. Here we have the IMF basically telling us that growth is booming and domestically, we already have an unemployment rate at 4.9%. Despite this, the market isn’t pricing the next hike till November (54%). If I’m wrong and that pricing actually does reflect the balance of opinion at the RBA, then they are playing a very dangerous game given “there is not any major downside risk [to global growth] at this point”.
That leaves inflation as the single biggest threat to the economy. The thing is, once it's established, it can only be brought down with great pain – and if the retailers association, stock brokers and other opponents of rate hikes today think life is tough now, then they need to think about what life is going to be like if inflation gets out of hand. You guys won’t have to pretend life is miserable, with an unemployment rate of 4.9%, because it will be . The additional problem is that the unemployment rate won’t be at 4.9%. It’s a lay down misere, hike rates Glenn."
