The time for a 50 point increase(s) was 2006. If they had been more aggressive earlier they might not be in this predicament.

I don’t mind (much) how quickly they raise interest rates, but I do wish that they would raise them by a quarter of a percent, rather than by 25 basis points, if that’s the increase they choose. Use of the term “basis points” in general public discourse is just pretentious wanking intended to impress, well, non-economists; much as socioligsts insist on “biparating” things, rather than splitting them. Now, I don’t mind if economists want to out(basis)point each other, as long as its done in the privacy of their own homes or orrifices. But, pleeease, spare the punters from this crap.

And I agree with Mark and other bloggers that by stressing its tightening bias, the Bank is trying to scare everyone. But moral suasion is a two edged sword. It can deflate inflationary expectations (which is good) but raise bond market yields (bad because it can then force the Bank to respond by raising interest rates more than it really wants: let’s face it the Bank is influenced by markets as much as the other way around).

“The discussion noted that a good case could be made for the larger move, on the grounds that the inflation outlook had deteriorated and the risk of inflation expectations becoming dislodged had increased.

“Thus there was a case for the board to send a stronger signal of its intention to act as necessary to reduce inflation.”

Some sympathy for borrowers

But the central bank decided against such a move after it noted the level of interest rates already faced by borrowers.

Since the early 90s, the RBA has a marvelous record and has shown excellent judgment in periods of uncertainty like the present one. So it is presumptuous to offer advice but here are three reasons why the RBA should NOT raise interest rates on Tuesday and wait two or three months to decide:

* credit market are still brittle, with the risk spread between the official cash rate and the rate on Australian prime residential mortgage-backed securities at 75 to 80 points compared with a normal spread of 30 to 40 basis points;

* the economy will gradually slow down of its own accord because of the wealth effect, the effects of the world economic slow-down, an over-valued exchange rate (reflecting large interest rate differentials), the effects of the promised fiscal tightening in 2008/9 and the delayed effect of earlier interest rate increases (monetary policy takes about a year to impact fully on the economy and we have had three official interest rate rises in the last six months or so plus an unofficial one by financial institutions);

* many of the inflationary forces in the economy are of the cost-push variety (oil, utility prices, food etc.) which dampen demand but do not respond much to domestic monetary policy; while a rise in interest rates will reduce the risk of a wage-price cycle, that risk is really quite small in todays deregulated labour market (even allowing for the proposed Rudd Government changes);

End of quote. Just goes to prove what Bernard Shaw said about economists.

Schr

But NG will be pleased to know that I’ve heard more than one financial institution financial officer say much the same thing about 25 basis point rises.

I’d imagine the RB is pretty damn nervous about what they’re doing and that despite their public stance, Tim’s take may be close to the truth.