In deciding to hold off on another interest rate cut, the Reserve Bank’s board appears to be waiting to find out what the past was like. Michael Pascoe reports.
I don’t know where to begin with six of the nine RBA board members, the ones who want to wait for another meeting so they can consider what the Bureau of Stats (ABS) will tell them was happening some three months ago. They have no grasp of the present, so forget about the future.
The same six have no faith in the RBA’s own forecasts. Hilariously, they will only trust the forecasts after they have been proven correct. That’s a key part of why they didn’t cut rates again yesterday – they want the bank’s forecasts to be confirmed by the ABS when it hands them the story of the past, the June quarter CPI due to be published on July 30.
But more hilariously, if you’re a veteran RBA watcher with a twisted sense of humour, is that the main reason for not cutting was the way they interpreted a couple of parts of the monthly CPI figures while saying they ignore the monthly CPI figures.
That’s right. The RBA board that says the monthly CPI figures are rubbish and can’t be trusted – “we have to wait for the quarterly figures to be sure that what happened, happened” – also says rates couldn’t be cut because two parts of the monthly figure were a little higher than they expected.
Ignore the overall numbers saying inflation is in the target zone but fret over the (allegedly) unreliable reading of the price of building a home and buying durable goods.
What about the weather?
I’m imagining how the anonymous six comprehend the weather report on the nightly news. Most of us largely ignore what the weather person says about today’s weather, concentrating on tomorrow’s forecast to decide whether to take an umbrella in the morning. The RBA Six instead make tomorrow’s umbrella decision based on whether it rained today. Or, more likely, yesterday.
Yes, folks, it’s pathetic. And it’s worse when you parse some of the supporting phrases in the board’s statement, especially the subheading “The outlook remains uncertain”. That’s in the “no shit Sherlock” category.
I was nearly feeling sorry for Governor Michele Bullock facing yesterday afternoon’s media conference. Was she one of the six Nervous Nellies, the ones without the courage of having a conviction, or one of the three who wanted to cut now, who perhaps take seriously the idea that
the RBA is supposed to be ahead of the game, not forever playing catch-up with the past?
If she was one of the three, she was doing the best she could with a difficult job, promising a rate cut at the next meeting unless the June quarter CPI turned out to be a nasty surprise, which she did not think it would be.
Ah, the future, it is uncertain until it is the past.
Not trusting the CPI?
And then there’s the half-hearted flipping on the monthly CPI figures, dissing them one minute but using them as the excuse for fence-sitting the next. No, the monthlies are not quite as solid as the quarterly version, but they have been much more useful than the quarterly for pointing the direction, much more useful for providing an idea of what is happening now rather than three months ago.
Also, without getting into the nonsense of the bank ignoring its actual mandate, the headline CPI, instead, goes with a “trimmed mean” measure, which has actually been less reliable when it comes to indicating turning points.
Here’s the dodgiest bit of the board’s statement that used the monthly numbers it otherwise dismisses as it’s excuse:
“While recent monthly CPI Indicator data suggest that June quarter inflation is likely to be broadly in line with the forecast, they were, at the margin, slightly stronger than expected. With the cash rate 50 basis points lower than five months ago and wider economic conditions evolving broadly as expected, the Board judged that it could wait for a little more information to confirm that inflation remains on track to reach 2.5 per cent on a sustainable basis.”
As explained in the media conference, the data that left the six clutching their pearls were house building and durable goods prices. The board still thinks it will be all right, but, well, maybe, just in case… because the six don’t trust the bank’s ability to forecast anything.
There’s other stuff about the mimsy board members to whinge about, such as the usual repetition of various excuses for ignoring the lived reality of the labour market not causing inflation. My favourite is the bank’s “business liaison”.
The board statement repeated that “various indicators suggest that labour market conditions remain tight”.
And, “Measures of labour underutilisation are at relatively low rates and business surveys and liaison suggest that availability of labour is still a constraint for a range of employers.”
Oh, spare me. Ask businesses if there’s a shortage of labour worth employing, and the answer will always be “yes” unless we’re in a recession with high unemployment.
And while there’s the usual rabbiting on about productivity, nobody wants to say that a shortage of labour pushing up wages is a driver for business to invest in greater productivity. Productivity growth has not picked up because business lacks the vision, the talent, the incentive and the long-term view to invest to lift it.
But I digress.
More double-speak
The governor had a line ready at the media conference about the split opinion: “Reasonable people can have different opinions.”
Which has about the same value as saying the future is uncertain.
“There remains a risk that households and firms delay expenditure pending greater clarity on the outlook,” the board observed.
Nobody is seriously suggesting the Trumpy future is about to surprise on the upside; it’s all downside.
Economics 101 holds that monetary policy works with a whopping great lag. In the real world, the present world, people are scared, as demonstrated by the banks on Monday showing only 10 per cent of those with mortgages are taking the opportunity to reduce their repayments.
In the real world, the first two rate trimmings have had stuff-all traction.
But let’s wait to see just how weak the economy can get before trimming rates again.
Michael Pascoe is an independent journalist and commentator with five decades of experience here and abroad in print, broadcast and online journalism. His book, The Summertime of Our Dreams, is published by Ultimo Press.