The Reserve Bank of Australia really does want Aussies poorer

As the evidence of a slowing Australian economy mounts, Governor Michele Bullock quietly told journalists the RBA wants Australians to be poorer. Nobody seemed to notice except Michael Pascoe.

The problem with reporting a speech by the Reserve Bank Governor is that everyone tends to run the most obvious angle – “some people will have to sell their houses!” – or the preferred political angle – “RBA v Chalmers fight!” – as no journalist wants to be seen as missing the day’s big headline.

Unfortunately, this means the main news can be missed, and something that is not news and is entirely obvious – that some people have to sell their houses – dominates coverage.

That is what happened last week when Governor Bullock delivered the annual Anika Foundation speech and took questions. She made two important statements that nobody seemed to pick up and a third that only one journalist reported.

For mine, the real headline was that the RBA wants Australians to be poorer; to have a lower standard of living than they currently have. Think about that – average Australian living standards have been going backwards for two years, but the RBA thinks they’re still too high and wants them down.

That is what follows from the Governor’s answer to a question about the preceding day’s pitiful GDP growth numbers – COVID aside, the weakest growth since the early 1990s recession. Hugh Riminton asked why the bank wasn’t softening its interest rate predictions, given that household consumption had come in significantly lower than the RBA forecast.

“In simple terms, Hugh, it’s the difference between growth rates and levels,” Ms Bullock replied.

Get it? To translate into English: Sure growth is miserable, negative on a per capita basis, but the level of consumption is still too high. We want you to have less, to be poorer. Or, in the Governor’s own words:

“It’s true that the growth rate of GDP has slowed. GDP itself was around where we forecast it would be, but the components were a little different. Consumption was a little softer. However, part of monetary policy’s job has been to try and slow the growth of the economy because the level of demand for goods and services in the economy is higher than the ability of the economy to supply those goods and services. 

“So there’s still a gap there. So even though it’s slowing, we still have this gap. Part of that is because the supply side of the economy isn’t performing as well and productivity is part of that. Part of it is that demand was so strong coming out of the pandemic that its level is still above the ability of the economy to supply the goods and services.

“That’s why inflation is still there. So I understand why people would think that as things are slowing, that should be a reason to lower interest rates.

But we need to see the results in inflation before we can do that.

Reserve Bank inflation backflip as Bullock disses Chalmer’s CPI reduction

It’s about demand, not growth

There was that “level” thing again – the bank doesn’t care if growth is slow. It wouldn’t care if it was negative. It wants us to shrink our demand. 

People who aren’t monetary hawks chanting “lift rates!” will see some of the obvious problems with this RBA policy.

Key factors in our “sticky” inflation aren’t or are barely influenced by interest rates – e.g. insurance premiums and health costs – but the RBA tightens policy anyway. (And, yes, policy is still tightening – the RBA says the last rate rise way back in November is still working its way through the system.)

Furthermore, that more restrictive monetary policy is making some key aspects of the alleged demand/supply imbalance worse, most obviously rent and housing costs. While trying to kill demand, the RBA also is wounding supply, keeping inflation “sticky”. 

Ms Bullock’s predecessor, Philip Lowe, addressed that very point two years ago in what might have been his best speech. Life had been easier for central bankers when inflation was all about excess demand.

“Life is more complicated in a world of supply shocks,” Dr Lowe said. 

“An adverse supply shock increases inflation and reduces output and employment. Higher inflation calls for higher interest rates but lower output, and fewer jobs call for lower interest rates. It is likely that we will have to deal with this tension more frequently in the future.”

Translation:

When a supply shock increases inflation too much, lifting interest rates can just make it worse.

A poor ‘solution’

The current RBA management just wants you to be poorer.

Governor Bullock’s other overlooked admission was in answer to a question that was aimed at pushing the “government spending is to blame for inflation” line, which she dismissed by saying:

“Government spending is not actually the main game here. I think as we saw in the National Accounts yesterday, consumption is really weak. We are looking for a recovery in consumption but if that doesn’t occur, then that’s actually going to be a really important piece of information and it’s also going to be really important for the inflation outcomes. I think basically we should be focusing on the breadth of what’s happening in the economy, demand as in total demand and not focusing on individual components and thinking about what that means for the inflationary pressures in the economy.”

See that? While wanting a lower level of demand, the RBA is expecting consumption to increase. The RBA’s hawkish promise of no interest rate cuts this year appears to be based on its guess/bet that the tax cuts were going to bring consumers out spending.

the spendathon isn’t happening

Not only did the RBA woefully overestimate consumption in the June quarter, it shows no understanding of battered consumer psychology now. As the mounting data continues to show, the spendathon isn’t happening. Memo RBA: that’s “a really important piece of information.”

Turns out economists searching for meaning in the entrails of historical graphs are useless at divining “the vibe”. Time to hire some psychologists instead.

The third insight

Bullocks’ Anika Foundation speech presented a third mainly overlooked insight. The Guardian’s Peter Hannam asked a good question about the RBA’s quarterly forecasts being made on the basis of what the money market is betting will happen to interest rates, rather than what the RBA thinks (or actually knows) it will do. Bit silly when you think about it.

Mr Hannam wondered if the bank also ran through its models its own idea of where interest rates would be, rather than the money market’s guess, and what that meant for unemployment.

According to the quarterly statement on monetary policy, the bank’s model computes that if rates are cut this year (the money market’s bet), inflation will stay too high for too long – the trimmed mean measure is 3.1%  for this financial year despite unemployment rising to 4.4%.

If this monetary policy thingy works then, it looks a fair bet that feeding higher rates for longer into the model should predict higher unemployment and lower inflation than what was published.

Ms Bullock answered that the RBA “can do that exercise” but professed no knowledge of what the numbers might be.

It looked to me like she may have wanted to dodge the implications of the question. I would be disappointed with the lack of intellectual curiosity in the bank, as I was when it said it never modelled the inflationary impact of tax cuts if the board wasn’t fiddling with the rangefinder on the only tool it has.

Peter Hannam was the only journalist to record that point and then did it modestly at the end of his column.

So, tying the three overlooked strands together, our central bank wants us to be poorer, fears we poorer consumers will start splashing money around sometime soon, and actually believes the unemployment rate will be higher and inflation will be battered down quicker than it officially forecasts.

That’s all more important than stating the obvious that people sell their houses when they can’t service their mortgage.

Sell your homes, let’s fight inflation! | Scam of the Week