As of yesterday, the Reserve Bank is pursuing policies designed to dampen down economic activity, with a view to keeping the inflation monster at bay.

The Rudd Government, meantime, has consistently refused to acknowledge it jumped the gun on economic stimulus and is still reluctant to wind back a spending program that has turned a $10 billion dollar surplus into the largest deficit this country has had to live with since the demise of the Keating government. So, in effect, we have the Reserve Bank pouring water onto a fire on one side while, on the other, Wayne Swan is adding petrol. Can anything be more silly? It would be the equivalent of a householder trying to run a spending spree and a long-term savings program at the same time.

The good news is that yesterday’s decision to hike interest rates is a clear sign that the Reserve Bank considers the remarkable recovery we have seen over the past six months to be real.

The Reserve, rightly or wrongly, is of the view that the Australian economy is in good shaped and well-placed to capitalise on emerging recoveries in countries such as America.

We are already being buoyed up by the better-than-expected performance of the Chinese economy which, it has to be said, has done pretty much all the heavy lifting in turning this crisis around.

While the local sharemarket was not initially thrilled by yesterday’s decision, there is a view that in the longer-term this vote of confidence in the strength of the Australian economy could drive it to fresh highs.

With further rate rises tipped before Christmas, it is essential the Federal Government grasps the nettle and admits that its emergency measures – including the banking guarantee and the stimulus spending – are actually endangering the economy they helped to save.