Friday, March 12, 2010

Hello the economy is recovering… better flatten it

In the latest OCR comments release the Governor of the RB tells us that he expects to move interest rates up toward the middle of the year as the economy recovers. His job remains that of targeting price stability – real price stability, i.e. net of inflation.

Unless he plans to print money it’s difficult to see why there should be inflation. Yes prices will move up if some resources become more scarce than they are now – which is what should happen and is what we want so as to signal the need for more supply.

Providing the amount of money in circulation matches the amount needed for the transactions there can be no inflation, only relative price changes – which are neither harmful nor  cause for a central bank to lift interest rates.

Why on earth then one would announce in advance that interest rates will be going up mid year is beyond me – unless one likes the idea that one holds the levers and has a mandate to “control” the growth rate in the economy. It’s that fear that should keep us awake.

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