The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Monday, July 4, 2011

Bloxham: Come hell or high water, the RBA should hike if inflation rises

A good op-ed from HSBC's Paul Bloxham:

"But come hell or high water, the RBA should seek to meet its mandate of 2-3 per cent inflation on average over the business cycle, even if that involves bludgeoning the non-mining parts of the economy into submission. If speeches from senior officials are a guide, it will do that.

A quick look back at a long history of mining booms tells us this is definitely the right thing to do. On previous occasions, allowing generalised strong wage rises and inflation -- because other sectors of the economy sought to gain from mining booms through these channels -- was a big mistake.

This is not only because it misallocates capital and labour away from where it is most profitably applied but also because households and businesses begin to expect higher wages and inflation, which distorts spending decisions. History tells us that at some point this all ends in tears, with a recession needed to get inflation out of the system...

And as the RBA seeks to raise rates above average levels to contain inflation, it will no doubt face criticism. When rates go up, the RBA always does.

But this time the challenge is tougher, as the parts of the economy on which the RBA has its largest effect are already lacklustre. Higher rates will probably cause further weakness in a range of areas, including retail sales, already under pressure from online competition; housing prices, already broadly flat; and small businesses, which are already struggling.

In this environment, communicating the rationale for higher rates will be a challenge. Indeed, the Reserve will need to continue to highlight why the mining boom is good for Australia overall, much as the governor did in a speech last month.

Two benefits of the mining boom bear repeating.

The first is its effect on household incomes, which are now growing at well above average rates thanks to strong employment and wage growth.

The second is the strength of the Australian dollar, which gives Australians greater purchasing power over foreign goods, services and assets.

Of course, David defeats Goliath. But unlike the RBA, David had a sharp and targeted instrument, not a blunt one (a sling and stone, for those interested). Let's hope the RBA is nonetheless successful in achieving its price stability goal, as this is certainly what's best for Australia's medium-term prospects."