At a glance it might seem a bit of monetary policy wonkery, but the real-world implications are huge, suggesting the RBA Review might cost Labor the election, Michael Pascoe reports.
When the RBA refuses to believe what has already happened over the past year and admits it doesn’t know what is happening now, a difference of 0.2% in its more-often-wrong-than-right inflation forecasting over the next two years should be about as vital for setting interest rates as last year’s wool price.
But thanks to Jim Chalmers’s dubious RBA review, on current polling, it looks like costing Labor the election.
Instead of the first-rate cut in December, the second this week, and indications of another on the horizon, giving Labor some real momentum in slaying the inflation dragon, Albanese will be campaigning on a single begrudged trimming and RBA warnings of no more to come.
A weakened RBA and triumphant Treasury saw Chalmers’ review swallowed without reservation, embraced with apparent enthusiasm even. The result is our central bank effectively ditching the flexible inflation target that had served it relatively well for three decades, replacing it with a straight jacket.
Face or facts? Falling inflation makes a compelling case for Reserve Bank to cut rates today
This pleases the doctrinaire hawks who want higher unemployment to push down wages, remembering the good ol’ days of previous administrations when wages suppression was official policy. Too bad that it retards our economic growth and all that flows from it.
Rate cut decision
As was made clear on Tuesday in the RBA governor’s media conference, the bank only pays lip service to its actual mandated target of keeping CPI inflation in the 2-to-3% zone over time. It’s now all about the precise trimmed mean at 2.5%, the midpoint target recommended by the review without any evidence of it being superior.
The result is the RBA being late to the rate cutting party, repeating the mistake of not believing what was in front of it when it was slow to start lifting rates in 2022.
The RBA now knows its precious trimmed mean inflation was running at an annualised rate nicely under 3% over the second half of last year. And, as printed in the Statement on Monetary Policy on Tuesday, the RBA thinks the trimmed mean measure is running at 2.7% cent now and is forecast to stay there for the next two years even if it cuts rates twice more this year.
But, thanks to Chalmers’ review, that’s not good enough to ensure more than this week’s trimming.
Tuesday’s was a most curious and somewhat frustrating Statement and media conference. The RBA is printing one thing but saying another. The bank claims to be “data driven” but it doesn’t believe the data in front of it, let alone the forecasts it publishes.
If it did, Tuesday was a great opportunity for the RBA to give itself a pat on the back.
Inflation was brought down within the target range, even within the forecasting margin of error of the silly 2.5%, with a strong labour market and unemployment steady around a lowish 4%. How good is a soft landing on a narrow path?
The outlook, what outlook?
And, thus, yes, the outlook would be for another rate cut on April 1, if only to make up for the one that should have happened in December. Alas, this RBA doesn’t have the courage of having convictions. Despite the data, it’s all too uncertain.
“I don’t know,” admitted Governor Bullock.
With respect, Governor, nobody ever “knows”. Yes, to repeat the cliché, forecasting is hard, especially forecasting the future. Nobody has a reliable crystal ball. Nonetheless,
it’s the RBA’s job to go with what it does have.
And you know what worries the RBA board the most, as explained in the final question of the media conference? The labour market that it is struggling to understand and simply doesn’t believe.
Governor Bullock said it was concern about the tightness of the labour market that was the strongest argument in the board meeting for not cutting rates, that made it a close decision before reaching “consensus”.
The past year has shown Australia can enjoy a strong labour market and unemployment of 4% and disinflation.
The nebulous employment estimates
The RBA waffles about “full employment” because it doesn’t know what it is, ditto the NAIRU (the non-inflation-accelerating rate of unemployment) that it prefers not to talk about.
The RBA believes the labour market is “tight”, but what it can’t say is whether it is too “tight”. It doesn’t know.
And snap, right on cue, the December quarter wage price index yesterday prints at a low 0.7% for the quarter and 3.2% for the year, another slice of data showing it is not too tight. And snap again, Australia’s biggest business lender, the NAB, reports a profit fall with more borrowers falling behind in their repayments.
I put to Governor Bullock on Tuesday that a year ago, the bank’s statement said it was possible we were at “full employment” but not very probable. After 12 months of unemployment around 4% and inflation falling, the latest statement admits it is “possible” the bank got it wrong. I asked how many months would it take before the bank accepted it got it wrong.
The Governor answered that full employment was a very nebulous concept that you can’t put a number on. The bank was “surprised” that unemployment was still at 4% with a strong labour market and inflation was falling…and the jury was still out.
In the governor’s answer and within the statement document, it is surmised that some of the disinflation has come from profit margins being compressed. It was not stated that this was necessarily a bad thing, but for at least some board members to be pushing back on the “tight” labour market smells to me like a bias on the board towards capital having a greater share of profits rather than labour.
After all, that had been the trend in those good ol’ days.
The simple question for the RBA is that, as it says, monetary policy remains restrictive and if it keeps rates restrictive for too long to chase the review’s 2.5% precise target, a mere 0.2 below what’s happening and is forecast to happen … well, for the want of a nail the shoe was lost and so on.
How are you feeling about that review, Jim?
Labor’s credit. A strong job market and inflation coming down
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.