There will be thousands of words written about this decision. Henry applauds it (“Better late than never“) and The AFR described it within minutes as “Defiant RBA tightens screws”.

Paul Kelly explains in The Oz today how the Howard/Costello duo have built their government’s longevity in government on trust:

John Howard and Peter Costello are campaigning on trust. It may sound incredible, but it is the fact. This is how they won the 2004 election and despite the AWB scandal, the Jake Kovco tragedy and the Iraqi mire they still run on trust.

This will be mirrored in next week’s budget. It won’t be a budget of reform or vision or innovation. It won’t be a budget of big ideas or big risks. It will seek a balance between containing interest rate pressures and rewarding households. It will be “an end of history” budget that reflects a government that has achieved its model. The budget will be a tweaking of the Howard-Costello model…

Any interest rate increase this week or next month will be greeted by the Labor Party as a breach of trust. It will hurt the Howard Government in a tangible and symbolic way. Howard and Costello will take a bath. Their aim will be to offset any interest rate increase now by falling rates in the late 2007 election cycle.

And if we move for a moment to the Current Account Deficit (CAD), Access Economics has said better than Henry what we have been saying for the past two years or so. “Every lesson of history is that markets ignore current account deficits for a long time and then exact sudden and messy vengeance in a belated overreaction. And when markets do finally take note of Australia’s current account deficit, they will mark down the Australian dollar and sharemarkets and push up market-determined interest rates.”

Read more at Henry Thornton.