Monetary policy tensions rise ahead of budget

The compromise cut of 25 basis points in the cash rate yesterday, to 3.0 per cent, reeks of tension over the stance of monetary policy.

The 50 basis point cut faction of the RBA board and advisers got beaten or backed off yesterday, and in doing so maintained a contentious approach to monetary policy in Australia.

John Howard conceded his weakness in 2007 in failing to dictate monetary policy to the RBA and his Labor replacement seems unlikely to repeat the error - all the more so now that Kevin Rudd and his agents on the RBA board appreciate how much they misjudged the pricing plans of banks.

The hawkish stance remains even though inflationary pressures have largely abated.

While inflation may return over time thanks to the public debt binge now under way and whenever it is that the unused capacity comes back into use, the timing of that threat is distant.

The worldwide production slowdown of the last year is likely to last, and the easier inflationary conditions we have now will also last in what the RBA in monetary policy pronouncements likes to call "the period ahead".

So the addition to stimulus from easier monetary policy is something the Australian economy can take. Rates can, after all, always rise later.

The IMF thinks Australia can take twice the announced fiscal stimulus of the Australian government.

There's no reason monetary policy cannot be made more aggressive and supportive of national economic goals.