Financial markets have dismissed the RBA's statement that it is "concerned about inflation" and considered hiking yesterday. They are, moreover, unlikely to believe any inflation forecasts the RBA publishes on Friday, since they are reasonably assuming that if Australia's central bank will not act to address its current 3.5% pa core inflation problem (over the last half-year plus), the RBA is likely to be equally unwilling to deal with future inflation woes if it comes at the cost of lower growth and higher unemployment. I guess people have got lazy after 20 years of uninterrupted growth: they seem to forget that low inflation comes at a cost.
Sadly, the RBA's inability to control core inflation in 2011, much like 2007-08, punishes all the prudent people in Australia--the net savers who get taxed by inflation--and rewards the less prudent net borrowers, who are paying lower interest rates than they should be and having the nominal cost of their debt reduced (click to enlarge chart).
The costs to employment and growth (read revenues) seem to be the main focus of the RBA's dovish Board, which is mooted in reporting to have argued for rate cuts. With the departure of the two biggest inflation hawks from the Board in recent months, it is made up of six private sector doves. These include three directors of resources exporters hurt by a high dollar, a Director of the retailer Woolworths, the former CEO of Woolworths, who is also Chairman of the advertising-sensitive Farfax, and Deputy Chair of a commodity exporter, and a former economics advisor to a Labor Prime Minister.
One of the Board members, Roger Corbett, the former CEO of Woolworths, current director of WalMart, Chairman of Fairfax, and Deputy Chairman of PrimeAg, is reported to be assertive, and has recently argued in the media that he does not believe Australia has an inflation problem.
