Monday, August 13, 2007

Economic Management-2

In a previous posting ( here ) I suggested that:
"The Reserve Bank (RBA) uses monetary policy (interest rates) when fiscal policy (the budget) is ineffective, or having an adverse effect on the economy"

Today, the Reserve Bank has used its Quarterly review of monetary policy to foreshadow further increases in interest rates. It believes further rises will be necessary because the economy is still overheating (see economic streetracer ) and has revised its expected rate of inflation for 2007 and 2008 from 2.5% to 3%. It doesn't seem like much, but that is redlining the economy, and is unsustainable.

John Howard has two political problems on economic management:
  1. if he pushes "electoral sweeters" at voters before the election, he will pump even more money into the economy, and will be responsible for even more interest rate rises, and will be seen as being economically irresponsible.
  2. the Reserve Bank is showings its independence from government in ways that John Howard does not like.
John Howard has a history of taking effective control where he does not like outcomes. He took responsibility for wage increases away from teh independent judiciary, and put it within a Ministry; he put the once-independent tribunal that determines politicians' salaries under his own department (& effective influence); he wants control of water; he wants selective control of hospitals.

John Howard has a history of wanting "control". If he wins the election, he might well consider removing the Reserve Bank's independence, and put it under effective control of himself and the Treasurer.