A terrific article today from Michael Stutchbury leveraging hard off RBA Board Director Warwick McKibbin's insights. These seem like pretty hawkish sentiments from my vantage. At the very least, I take away from this that the RBA is going to have an almighty challenge preserving its inflation-fighting credibility in the years ahead (recall that both headline and core CPI have averaged way above the RBA's 2.5% target for the last decade. Even if you stretch the data back to 1993, when the inflation target was first adopted, the headline has averaged a still high 2.7%). So the question remains, will the central bank have the stomach to address these problems:
"AS a young economist with the Reserve Bank in the late 1980s, Warwick McKibbin privately warned that jacking up interest rates to 18 per cent would club the Australian economy.
When the Asian financial crisis hit in 1997, he suggested the Australian economy would be insulated by the big fall in the floating dollar. And, when the global financial crisis hit in September 2008, his model suggested Australia would be spared much of the fallout if we played our cards right.
So it's worth paying attention to McKibbin's warning the global economy is now blowing a commodity and Asian property bubble bigger than the US housing bubble that almost brought down the global financial system...
"That is why inflation is taking off all over the world," McKibbin says. "Over the next six months you are going to get so many surprises on the inflation numbers." In Britain, for example, consumer price inflation has risen to 4 per cent even amid the biggest budget crunch in generations...
McKibbin sees this as "70-72 all over again", or a re-run of the collapse of the Bretton Woods system of fixed exchange rates when the US ran a loose money policy to help finance its Vietnam war and its "Great Society" welfare spending. The result was the 1970s global stagflation of high inflation and high unemployment that was inflamed in Australia by Whitlam government spending and union wage demands."
