The board of the Reserve Bank meets today just as the various football codes prepare for their respective final series. Henry expects no news from the Bank tomorrow as it waits both for more international news – especially about the state of the US economy – and about the effects of rate hikes in May and August on the Australian economy.

The Bank’s retiring Governor will be able to watch the footy finals with a mind unclouded by the need to ponder how many rate hikes will be needed here, a question with which his successor, Glenn Stevens, will be grappling for the foreseeable future.

With inflation far too high, credit growth still too high (and rising), unemployment at record lows and the housing market recovering in the southeast of Australia and out of control in the west, we expect that at least two more rate hikes will be needed, and quite possibly more.

The big economic news in the past month has been signs of a slowing US economy and related easing of concerns about inflation. The US Fed led the way on 8 August with a pause in its hitherto relentless series of rate hikes. China has also continued to tighten monetary policy, and this seems to have weakened admittedly overly buoyant expectations in Japan and other Asian economies. Interest rates have also been raised in the past few months in Canada, the UK, Euroland, Thailand, Korea and Malaysia.

Locally, Henry is encouraged by signs that Treasury, as well as political Government and the Reserve, is now aware of the dangers inherent in the current and likely future situation. Monetary policy cannot provide the full control mechanism for the potential “energy superpower”. Knowledgeable observers will be keenly awaiting the government’s response in the next budget. We note that fiscal action before then should not be ruled out.

However, the Reserve will be well aware that loss of control over inflation would throw away hard-won credibility and that restoring credibility would be costly.

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