RBA makes room for mining-rest of the economy suffers

It was another terrible building approvals report released this morning with all sectors posting large declines with the public sector the only exception. Unfortunately this is what happens when the RBA makes room for the mining boom the rest of the economy suffers.

Yesterday's move to tighten rates was entirely appropriate given the RBA’s concern about inflation. Equally given conventional wisdom on the relationship between labour utilisation and inflation via the Phillips curve and the outlook and build up of inflationary pressures the RBA must act now in order that it does not allow inflation expectations, which have risen lately, to feed into actual inflation outcomes.

When you look at the breakup of global growth at the moment and you see that the world is growing at trend even though the NATO countries are essentially moribund we can see why the RBA is concerned. If the global economy, particularly the NATO countries, surprise on the upside then global growth will be well above trend over the next year or to this will further increase pressure on resource utilisation and allocation within the Australian economy.

Thus, even though I strongly believe that the pressure on the RBA from global growth 12 months hence will be to lower rates they have the luxury of doing so should their outlook on the economy globally prove to be too optimistic. Therefore they think theyhave nothing to lose by tightening rates now indeed by tightening now and again early next year they probably, with a little of the banks help, forestall any need to move substantially higher if they are correct. Equally if they're not they most probably reckon 'they"ll just drop rates.

Accordingly while I don't necessarily agree with what they've done based on my outlook based on their outlook they’re right. but the big question is is there view right and are they running the risk of driving the rest of the economy into the ground/ We think so.