Stevens didn't say there would definitely be another rate rise, nor when it would come. But those present left the room expecting there would be one - because Stevens's speech represented a return to the aggressive tone of the Bank's pronouncements before the latest rate rise earlier this month.
Stevens showed no sympathy for the wets, who would be prepared to accept higher rates of inflation. Nor was he prepared to tolerate any thought of an early withdrawal from the Bank's fight against inflation. He appeared dismissive, too, of the plight of young families in outer suburbs, who believe the 12 rate rises they have already had to endure are unfair. "Presumably, the same argument would mean that it is equally unfair to savers to put interest rates down when the economy is weak," he said.
Surprisingly, he made no mention of two facts that many economists regard as highly relevant to Australia's present economic situation: he did not acknowledge that the confidence of Australia's shoppers and business has already collapsed under the combined weight of 12 rate rises and the recent falls in the share market. Nor did he address the impact of the sub-prime crisis that has already driven the world's largest economy, that of the United States, to the brink of recession.
He noted that some people are relaxed about inflation because Australia's annual inflation rate on the CPI is only 3 per cent, a figure that merely puts it at the top of the Bank's target range. But he warned: "When we get the March 2008 (CPI) figures, we will most likely find that the rise over four quarters is more like 4 per cent." Stevens made it clear that he would not tolerate any upward revision of the target: "The surest way to higher interest rates is to accept higher inflation."
Just as oddly, Stevens also argued that monetary policy is not the "blunt instrument" that many people believe it to be. He insisted that monetary policy can work at many levels, including moderating the effects of rising terms of trade.
Monetary policy was also reviewed every month, so it could be reversed quickly if necessary, he said. Fiscal policy, however, is traditionally reviewed only in the months before the annual May budget.
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