Although overshadowed by a horse race and a presidential election, Reserve Bank Governor Michele Bullock today should seize her share of the headlines with a single word: Success! Michael Pascoe explains.
This afternoon, the battered RBA has a golden opportunity to regain some of the public respect it has lost in recent years. Governor Bullock can point to the facts – not the pet shop’s multitudinous opinions – and humbly celebrate the bank’s monetary policy working as intended, enabling the board to trim the cash rate by 25 points to 4.1 per cent.
Anything else will be a betrayal of the bank’s mandate, confirmation of a reduced institution’s lack of conviction and ticker.
Here are the facts that should be front and centre of the board’s statement at 2.30 this afternoon, numbers that all say the time to trim is now:
- The run of the past four ABS annual core inflation counts from its monthly figures: 4.1, 3.8, 3.4, 3.2 – a drop in the core inflation rate of 0.9 percentage points through the September quarter. That is a story of monetary policy working surprisingly well, inflation trending down to within a whisker of the target with a soft labour market landing.
- The September quarterly figures highlighting the bigger-than-expected drop in annual core inflation from 4 to 3.5 per cent – meaning the RBA is considerably closer to its inflation target than the world’s other major central banks were when they first trimmed rates, as reported here but widely ignored by the pet shop galahs.
- For a second opinion, yesterday’s Melbourne Institute’s monthly inflation gauge trimmed mean measure recorded an increase of 0.1 per cent in October, following a 0.1 per cent change in September. “The trimmed mean rose by 0.1 per cent over the three months to October, commensurate with the change observed over the three months to September,” the Institute found. “In the twelve months to October, the trimmed mean increased by 2.7 per cent.”
- The biggest housing markets have turned or are turning the corner on price expectations, removing the “wealth effect” spending impetus and rent increases are trending lower as renter resistance mounts.
- The ABS headline CPI landing at 2.8 per cent, within the bank’s target range. Yes, the extra shove to get below 3 did come from some temporary government rebates, but as Peter Martin explained in The Saturday Paper, that extra shove feeds into the future core:
“Low actual inflation, which is what the budget measures on electricity prices and rents delivered, is pushing down future inflation in other ways as well.
“Hundreds of thousands of contracts have escalation clauses linked to the consumer price index. If the CPI goes up more slowly, the price in the contracts goes up more slowly. The alcohol excise is linked to the CPI, as is the petrol excise, student debts, child support payments, family tax benefits and unemployment payments. If the CPI moves more slowly, a vast mass of other prices moves slowly in its wake.”
Another fact the RBA needs to accept is that its modelling is not very good at forecasting. The Governor’s tough talk about not cutting rates this year was based on predictions that were simply wrong – and not by a small margin.
Wrong assumptions
The RBA didn’t expect the headline CPI to fall below 3 per cent before the end of the year. Wrong.
The RBA didn’t expect its favoured core inflation measure to hit 3.5 per cent until December. Wrong.
The facts, both the present numbers and the bank’s forecasting errors, mean the Governor’s rhetoric is now out of date.
The quote commonly attributed to John Maynard Keynes applies:
“When the facts change, I change my mind. What do you do, sir?”
The commentariat’s consensus and the money market’s bet that the RBA will sit pat today is based on Michele Bullock’s mistaken rhetoric.
The economists forever asked their opinions tend to answer the question “What do you think the RBA will do?” rather than “What do you think the RBA should do?”
Not untypical is the former RBA chief economist Luci Ellis, now in charge of Westpac’s economics team, quoted in The Saturday Paper article as expecting “a change of language” after today’s board meeting, saying Governor Bullock “will soon have to acknowledge we are getting closer to the point when rates will start falling”.
What the? This is the facile stuff of expecting the bank to prioritise saving face in light of dud forecasts and inappropriate jaw-boning.
“Gee, fellas, we’ve been wrong and should trim rates today, but let’s not admit it. Instead, we’ll slide towards the right decision, pretending we haven’t made any mistakes.”
That would be appalling weak leadership. The present Governor, Deputy Governor and chief economist have never been in the position before of having to make the call to change monetary policy direction, of pulling the trigger. A degree of timidity after so much effort to convince people it wouldn’t be safe to trim rates is understandable but not excusable.
Inflation clearly falling
To again reference Peter Martin’s pay-walled story, he quotes previous RBA Governor Bernie Fraser regarding Governor Bullock’s semi-commitment to leaving the cash rate at the highest level in more than a decade as reckless when inflation is clearly on the way down.
“It is not good policy-making, and it is not in accord with what the bank’s job is,” Fraser told The Saturday Paper. “The job of the bank is to weigh up these things and make judgements about what is appropriate now in the light of what they can see ahead without getting locked into forecasting particular times when interest rates will move.”
Fraser said the job of the bank was to ease off on interest rates early, in the same way as the job of a driver was to apply the brakes before the car hits something.
The good news for the RBA after these harsh words is that the change in policy is the opportunity to celebrate the job that has been done, to claim success in walking “the narrow path” of bringing down inflation while not damaging the labour market.
But what matters more for this RBA board, face or facts?
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.