Did the Bank start cutting too late?
Posted December 11, 2008on:
In what appears to be becoming a “stand up for the Bank” day, I was surprised to see Steve Pierson at the Standard state that he believes the Reserve Bank cut interest rates too late!
Now, if the Reserve Bank had known exactly what was going to happen in the world and decided to hike rates for the hell of it I would agree – but ex-ante they (like the majority of other people) had no idea what was going to happen.
Steve appears to believe that the Reserve Bank was lifting rates to fight an increase in the relative price of petrol even though it was “obvious the economy was in dire straights”.
However, from what I remember the Reserve Bank was lifting interest rates because actual inflation was too high (non-tradable inflation is still well outside the band), and capacity constraints inside the economy were being stretched by a resiliant housing market, and most importantly, a sudden huge terms of trade boost.
Before criticising the Bank for targeting inflation, Steve should look at the Bank’s statements and get a feeling for what the Bank terms “inflation” – a place to get a run down on this is here ;)