The RBA’s third rate cut of the year was overshadowed on Tuesday by its downgrading of productivity expectations. Michael Pascoe argues the bank should not escape so easily.
Michele Bullock impersonated Edith Piaf on Tuesday. Despite all the evidence before and after the July RBA board meeting that rates should have been cut then, the Governor not only had no regrets, she claimed that sitting pat was the right thing to do.
And, no, none of the three board members who wanted to cut in July said “I told you” at this week’s meeting.
Well, they didn’t have to. The numbers have said it for them.
But this is a cautious RBA board, one lacking the strength of having convictions about the state of the economy, one where uncertainty rules.
Des doutes? Non
Specifically asked if, with the benefit of hindsight, there were any regrets about not cutting in July, Ms Bullock said:
“No. I think the right decision was to confirm that we were on track and we are on track. I said at the time in July that there were a few monthly numbers, they’re volatile, we don’t really know, but they did give us pause to think whether or not there were risks we had underestimated a bit of inflation. We were comfortable when we saw the quarterly numbers and five weeks I think was a relevant time to wait and confirm.”
The alternative view is that the board is not confident that it understands where the economy is and isn’t entirely sure where it was when it eventually gets the statistical scorecard.
The happiness with the unnecessary delay underlines this board’s cautious majority nature. Yes, the outlook is uncertain – but it is always uncertain.
Temps de dancer
The subsequent overlay of fearing consumers might get excited by back-to-back rate cuts reminds me of the old line about a Methodist minister admonishing newlyweds not to have sex standing up lest it lead to dancing. The economy is in need of some dancing.
That is demonstrated by the bank’s new quarterly statement on monetary policy downgrading forecasts for this financial year’s household consumption, business investment and public demand. Expectations for business investment growth have been slashed from 1.8 per cent three months ago to a miserable 0.6 per cent.
You can forget about productivity growth improving when business investment is flatlining.
Much of Tuesday’s media conference was given over to questions about productivity as the RBA announced it was catching up with some other central banks in downgrading its productivity growth assumption. Slashing the assumption to about 0.7 per cent over the next few years means the economy could only expect to grow by about 2 per cent, that growth effectively being the combination productivity and population growth.
L’economie n’est pas bonne
As the Governor explained, this exercise was admitting the reality of what productivity growth had been, not a forecast of what is ahead with possible policies.
But herein lies a conundrum for the Governor as she joins next week’s productivity round table as one of the scene setters.
In its overly cautious attitude to possible inflationary pressures, the bank keeps warning that the labour market is still a bit “tight”, that “underemployment is trending a little below our current estimate of full employment”. The bank makes it sound like the labour market being a bit tight is a bad thing.
I put to the Governor that, from the point of the overall economy and productivity growth, we should want the labour market to be a bit tight to put pressure on business to invest, so that the least productive businesses fail. Is this bit of “tightness” we have actually the right amount?
The Governor’s answer was that it was an interesting question and one hand some tightness was a good thing but too much tightness was not.
But do you think the market now is too tight or right?
Je ne sais quoi
“I’d say it’s uncertain,” Ms Bullock replied. “I’d say there’s some disagreement even amongst our staff, amongst people we talk to externally. Some people think it’s not tight at all, some people think it’s still a bit tight. I think the board’s assessment is it’s still a bit tight, a little bit tight, but its eased quite a bit and whether or not it’s full employment in terms of the board’s mandate, I think it’s something we might be getting close to that.”
Which means, um, it’s uncertain,
Yet the bank’s forecasts and the story of the past year say the present “bit tight” labour market is indeed right.
The RBA is looking hugely successful in hitting something very much like the sweet spot in its two areas of responsibility, forecasting core inflation to be 2.6 per cent for as far as anyone might try to forecast and the unemployment rate to be steady on 4.3 per cent, assuming another three interest rate cuts in the pipeline.
Too bad that the economy is lacklustre and the average Australian is still going nowhere.
Oh, and while the bank’s forecast for dwelling investment was about the only thing to be upgraded (from 1.7 per cent to 2.2 per cent), the SoMP noted that “despite recent strength, dwelling investment and leading indicators such as building approvals remain low in per capita terms and relative to underlying housing demand”.
Interest rates too high, unemployment up. Just as the RBA wanted
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.