Rates up, Dollar down. Reserve Bank diminished by dud review
The RBA has managed to worsen a questionable interest rate decision by undermining its own credibility as the dollar falls. Michael Pascoe writes.
The Law of Unintended Consequences is always at work. It is clear that the authors of the RBA review and the cheerleading squad campaigning for it did not intend to diminish the institution.
It is an institution whose reliability is as important as what it does.
But the RBA has weakened, and so the message it was trying to send with Tuesday’s rate hike has weakened: the pain that tighter monetary policy will yield fewer returns.
Rather than sending a strong message that the bank was committed to reducing inflation, the mechanism the review invented resulted in an increase that was quickly judged by the market to be sketchy.
While the rest of the world is either sitting back or contemplating lowering interest rates, our central bank raising interest rates would normally be met with a rise in our dollar. Instead he fell.
Disagreement in the ranks
The review, adopted without hesitation by Jim Chalmers, was accused of inventing a separate board to decide monetary policy, a board of part-timers who could overrule RBA professionals or, as on St Patrick’s Day, undermine the decision with a vote that showed the board was not at all confident it was doing the right thing.
The review adopted Jim Chalmers’ holus bolus, and the Treasury also included the idea of publishing the board’s votes on interest rate movements or inactions.
Therefore, the headlines of the 5-4 vote showing bullishness were a near-term event; The (theoretically) best monetary minds the country could muster were deeply divided on the logic of raising rates while the economy was being hit by an energy shock, thanks to the inmates of a Washington mental hospital running amok.
Didn’t go so far as to recommend a review every board member public opinion of one’s own opinion; Votes are left anonymous, but it is possible to make an educated guess about some of them.
Given the hawkish statements from the Governor and, more importantly, the lieutenant governor ahead of the meeting, it seems a pretty safe bet that two RBA members will vote to raise rates.
This means “outsiders” voted 4 to 3 not to raise rates. Members independent of the central banking institution were more cautious and would not do this.
What does this say about the strength of professionals’ arguments and the access part-timers have to RBA staff to form their own opinions?
Thus a strong anti-inflationist explanation became a weak one.
It’s a pain that there isn’t much gain in the inflation expectations department.
Inflation expectations
Some points to be noted about inflation:
- Where is the evidence that inflationary expectations are destabilizing, that markets think the RBA is losing control? Of course, the national newspapers continue to bleat, but that’s what they do. Latest RBA statistics publication It showed that market economists’ average inflation forecast two years later would be at a comfortable level of 2.6 percent, while the average inflation one year later was 3 percent, the top level of the policy range.
- Of course, consumers see the price at the gas pump now and expect inflation to be higher as the war continues, but if there is evidence that this is escalating, I haven’t seen it.
- One impetus for the ill-considered RBA review was greater transparency. Given the closeness of the vote, and especially the fact that the majority of “outsiders” disagreed with the bank, the goal of greater transparency should ensure that this alternative view is fairly covered. it was not given to ushat.
After decades of Martin Place mandarins being considered superior to Canberra mandarins, there had been suspicion that the Treasury would welcome RBA scrutiny ever since Chancellor of the Exchequer Paul Keating began to pay more attention to the RBA than his own department. Now this has been achieved.
Central banking is a difficult job. Someone else’s remark about a different central bank but it applies here:
Right decisions are unforgettable, wrong decisions are never forgotten.
The jury is out on whether this week’s verdict will be right or wrong. It’s a legitimate argument that higher energy prices will curb demand without needing extra monetary pressure, an argument that the RBA board’s vote will bear in mind.
Big four banks predict three consecutive RBA rate hikes
Michael Pascoe is an independent journalist and commentator with five decades of experience in print, television and online journalism here and abroad. His book, Summertime of Our Dreams, was published by Ultimo Press.
