The RBA is failing on the most basic measures and it’s time it was held to account

Fri, 19 Oct 2018  |  

This article first appeared on the Business Insider website at this link: 


The RBA is failing on the most basic measures and it’s time it was held to account

How’s this for an economic plan?

The RBA cuts the official cash rate to 0.5 per cent and on the back of that, the unemployment rate drops to 4.75 per cent on a sustained basis, underlying inflation hits the mid-point of the 2 to 3 per cent target range and annual wages growth lifts to 3.25 per cent.

This is what a range of credible economic models suggest would happen with such a simple and transparent monetary policy move from the RBA. And what’s more, it is free to implement!It would be, on all measures, a good economic outcome.

So why is the RBA not going to do it?

What kind of monetarist poltergeist has possessed them it is now a bad idea to try and hit their inflation target, put tens of thousands more Australians into work, and stoke a much-needed rise in wages growth? 

Why is the RBA the only central bank on the world seemingly obsessed with peripheral issues when the inflation target has been missed so comprehensively for so long?

Perhaps we can turn this monetary policy issue on its head for a moment.

The same economic models that produce those better economic outcomes with a 0.5 per cent cash rate show that if the cash rate stays at 1.5 per cent, the unemployment rate will not fall below the 5 per cent level recorded today at any stage through to 2022, underlying inflation will likely remain below the target range for a couple more years and wages growth will be condemned to stay well under 3 per cent, quite possibly near 2.5 per cent.

This is the choice the RBA is making by keeping interest rates too high.  

Recall that each 0.25 percentage point on the unemployment rate is equivalent to around 20,000 to 25,000 people. That’s a lot of people the RBA is choosing to keep on the dole queues.

For what?

Policy certainty? Financial stability?

Since the end of 2015, underlying inflation has averaged just 1.75 per cent, a substantial 0.75 percentage points from the middle of the target.

Not since 2014 has underlying inflation hit even the middle of the target.

And based on what we know about the economy, it seems likely that the next two years and more will see this policy failure continue. The costs are huge. Tens of thousands of extra people unemployed. Millions of people with substandard wages increases. All because monetary policy remains too tight.

It could also explain why the path to budget surplus has been slow and very rocky – the RBA has deliberately aimed to see a weaker economy which has curtailed the improvement in the automatic stabilisers in the budget.

Protests about ”house prices” and “household debt” cloud the debate.

But these refrains highlight the other critical error of the RBA – its reluctance to embrace macroprudential policies to address these specific issues when they were needed several years ago.

Those problems, to the extent house prices and household debt are problems, could be easily addressed with policies other than interest rates.

As we are seeing all too clearly now, macroprudential policy tightening has seen credit growth slow, household debt stabilise and house prices fall. Overwhelmingly, at least in recent times, this has been the result of tighter credit policies.

A cut to 0.5 per cent for the cash rate could easily be accompanied by the maintenance of further tightening of those rules if house prices and household debt remain a concern.

The Treasurer and others need to call the RBA to account.

The RBA’s independence is important but it should be called out when the policy settings are holding back opportunities and living standards. Even when the RBA is doing things right it remains answerable to the government — something central bank purists often overlook. Unfortunately for a few tens of thousands people unnecessarily unemployed, the RBA shows no sign of changing its tune.

Like the busker outside Wynyard station tapping on a plastic bucket — tap, tap, tap — the RBA monotonously insists the next move in interest rates is likely to be up, not down, even though its own forecasts show zero upside momentum in inflation from the current inappropriate levels.

The RBA is failing, and its own forecasts show an ongoing failure for the next two years.

Which other body could ever get away with that?

comments powered by Disqus


The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

Tue, 07 Jan 2020

This article first appeared on the Yahoo Finance web site at this link:   


The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

For many people, the cost of the fires is immeasurable. 

Or irrelevant. 

They have lost loved ones, precious possessions, businesses and dreams and for these people, what lies ahead is bleak.

Life has changed forever.

As the fires continue to ravage through huge tracts of land, destroying yet more houses, more property, incinerating livestock herds, hundreds of millions of wildlife, birds and burning millions of hectares of forests, it is important to think about the plans for what lies ahead.

The rebuilding task will be huge.

Several thousands of houses, commercial buildings and infrastructure will require billions of dollars and thousands of workers to rebuild. Then there are the furniture and fittings for these buildings – carpets, fridges, washing machines, clothes, lounges, dining tables, TVs and the like will be purchased to restock.

Then there are the thousands of cars and other machinery and equipment that will need to be replaced. 

What's ahead for the Australian economy and markets in 2020

Thu, 02 Jan 2020

What's ahead for the Australian economy and markets in 2020

Happy New Year!

2020 will be a year where Australia’s annual GDP will exceed $2 trillion, our population will get very close to 26 million people and we will clock up 29 years with no recession.

It is also a year where the economy will be a dominant issue for policy makers, will drive what happens to interest rates, will help drive investment returns and will feed into the well-being of the Australian community. 

2020 kicks off with relatively good news in terms of economic growth, even though the labour market is likely to remain weak, with wages growth struggling to lift and inflation remaining below the RBA’s 2 to 3 per cent target. The Reserve Bank may have one more interest rate cut in its kit bag, but by year end, the market is likely to price in interest rate increases, albeit modestly.

The ASX, which had a great 2019 is set to be flatten out, in part driven by the change in the interest rate outlook, but it should get a boost from better news on housing and household spending.

In terms of the specifics, I have broken down the 2020 outlook into a range of categories and given a broad explanation on the issues underpinning the themes outlined.

GDP Growth

It’s a positive outlook. A pick-up in GDP growth from the current 1.7 per cent annual rate is unfolding, with the only real issue is the extent of the acceleration.