As expected, the Reserve Bank announced this morning that it would increase the cash rate target by 0.25% to 6.5% – the highest level since November 1996.

Here is an excerpt from RBA Governor Glenn Stevens’ official statement:

In assessing the outlook, the Board gave careful consideration to recent developments in the global economy and financial markets. Credit markets in the US have experienced some turbulence in recent weeks, which may pose downside risks to the US economy. While this will need to be kept under review, developments to date do not appear to have changed significantly the broader global outlook. Even with the US slowing down, forecasts of global growth have recently been revised upward. High world commodity prices remain an important source of stimulus to Australia’s national income and spending.

For some months, the Board has recognised that stronger economic conditions were likely to put upward pressure on inflation, notwithstanding some dampening influence from the higher exchange rate. As a result, the Board has been of the view that further monetary policy tightening could be required. The main factors that had allowed time for further consideration were that, prior to this month, the two most recent inflation results had been unexpectedly subdued, and wages growth had remained moderate. However, the high CPI outcome for the June quarter indicated a less favourable near-term outlook, with the implication that any further increases in inflation would take place from a higher starting point than previously envisaged.

Oz politics

Rate hikes will embarrass the gummint but Henry must say he is deeply baffled by mysterious pre-emptive moves to change what economists call “fiscal federalism”. The Federal government running hospitals in northern Tasmania? Funding local councils in Queensland? Next it will be offering cabinet ministers to teach in parish schools.

Paul Kelly has said it best — “Howard’s folly”…

Read more at Henry Thornton.