For the second time in as many days the Reserve Bank has declined an opportunity to wave a big stick at inflation by hinting at higher interest rates.
In a speech in Sydney, RBA Governor, Glenn Stevens, left the clear impression he sees no reason to lift rates in the foreseeable future, even if it takes longer than expected to control inflation and bring it down.
Stevens made it clear the central bank remains committed to its goal of keeping inflation between 2% to 3% on average, even if annual price gains remain above that threshold for "a pretty long period.”
"We are of course fully aware of the possibility that people may fear that this temporary period of high inflation could, in fact, turn out to be persistent,” he said.
He expressed confidence about cutting inflation over the next two and a bit years, called for emerging economies to apply the brakes to slow demand and take pressure off commodity prices and their own inflation, and reminded us that the higher oil prices are acting as an extra restraint on the economy.
(The Thai central bank lifted its key rate last night).
His rather sanguine commentary, made to a Sydney business lunch, knocked the Aussie dollar lower.
It had peaked at 98.49 US cents but closed under 98 US cents; it was trading around 97.40 US cents this morning.as traders re-assessed their belief that interest rates would rise again this year.
Not with comments like this:
"The evidence is pretty clear that some key components of private demand are now on a slower track. As always with such episodes, the extent of that slowing, and its duration, are uncertain. But to this point, something not unlike what was envisaged in the May outlook appears to be occurring.
"Moreover, it looks more likely now than it did a couple of months ago that this more moderate track for demand will continue.
"If it does, it will, in due course, begin to exert downward pressure on those elements of inflation that had picked up in response to strong demand.
"That will probably take some time and it may be too soon yet to see much of that influence on the CPI figure due next week. Indeed, on a year ended basis,
"CPI inflation might rise further before it starts to come down, particularly given the recent further surge in global oil prices beyond what was assumed in our May projections.
"By the way, this surge in oil prices does not, in itself, amount to a rise in Australia’s terms of trade. As such, it is likely to be exerting some further restraint on non oil demand, which would, all other things equal, tend to dampen pressure on non energy related prices over time.
"On the information available at present, we still expect inflation to fall back to 3 per cent by mid 2010, and to continue declining gradually thereafter."
"So I think that our chances of keeping inflation low over the medium term are good.
"This outlook does involve a period of significantly slower growth in demand in Australia than we have seen over the period up to the end of 2007.
"The Bank has been candid about that. But controlling inflation has always involved being prepared to slow demand, for a while, when needed.
"Not taking adequate steps to that end would have costs."
And he had this to say to governments and central banks in emerging economies, such as China, India, Russia and Brazil:
"What is needed is for emerging countries to adjust their policies according to their circumstances.
"Without that, we risk a new manifestation of the ‘global imbalances’, in which too much of the burden of controlling inflation would be placed on the major advanced countries, where growth is already slowing."
"Policy makers in a number of emerging countries are now adjusting policy settings in the required direction.
"In fact, the list of developing countries that have recently tightened monetary policy is now growing quite long, and includes some of the big ones – like China, India, Brazil and Indonesia. Perhaps more tightening will follow. Inevitably, growth will slow in the regions concerned as a result.
"But a period of more moderate growth would be a better outcome than either allowing inflation to go unchecked or expecting the major economies to do all the heavy lifting."
It all sounds boring doesn’t it? But in there is a distinct hint that the bank believes its early tightening of monetary policy has worked; helped unexpectedly by the impact of the credit crunch forcing extra rate hikes on the banks, and by the impact of the surge in oil and petrol prices.
For all the pain and extra expense, there’s now a small light in the long tunnel.
