They are coming for the RBA

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To me, it’s as clear as day that Australians hate their new economy. And, at face value, what’s to like? Although the MSM drones on about our good fortune, the fact is, it’s not like the old times. Back then, blind Freddy could get rich, just buy a house, then another! So long as you could service the mortgage, you were a genius. And the rising costs around you didn’t matter.

Well, no longer, and it’s hurting all sorts of people and institutions. Take the above chart, for instance. I’ve no doubt that the current Federal government is largely responsible for its low standing in the polls. Policy backflips, knifing leaders, carbon taxes, failed asylum-seeker policies, piss weak communication and minority government are all playing a role. But I’ve equally no doubt that the interest rate rises that have accompanied the “adjustment” to the mining boom have upset a lot of folk.

Interestingly, to date, the RBA has marched through this conflict unscathed. Recently, union boss Paul Howes had a bit of a dig, but apart from that, the RBA has stood apart, even though it is the one wielding the axe and it is also the one that most often made the case for the “adjustment” to mining-led growth (this is not a judgement, it’s an observation).

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However, I suspect the calm at the eye of the battle is about to ruffle.

It is one thing to be raising interest rates, or threatening to, when jobs are raining from the heavens. You’re an economic warrior then, gleaming with righteous sweat as you hike the monetary mountain and slay the inflation dragon.

But what about when jobs start drying up, which is where we are now? A whole series of indicators have shown a turning point in the labour market has already passed and an increasing number of private banks are forecasting unemployment rises to 5.5% and even 6% next year. What happens when the RBA straps on its gauntlets and announces its intention to defend the “adjustment” to mining led growth when the peasants are starving? Then heroism starts to look like tyranny (again, no judgement intended).

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Even the hapless leaders on the receiving end of the adjustment can figure this one out. They’ll come for the RBA, stoking their hordes into a wild battle cry for lower interest rates, whether it’s to boost housing or to lower the dollar. Depending on how things go, the entire services economy could turn on the, to date, ignored generals sitting on the hill.

And the danger doesn’t end there. As Michael Stutchbury points out, in something of a scoop:

This morning’s Reserve Bank board meeting won’t be as heated as in March and April of 2009, when Ken Henry aggressively pushed for much deeper interest cuts to support an economy seemingly already in recession.

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The then Treasury secretary became noticeably agitated when the board’s only academic economist member Warwick McKibbin resisted the pressure to follow down the US Federal Reserve, the European Central Bank and the Bank of England towards zero official interest rates.

It was a repulsion of similars. Henry and McKibbin were both 52-year-old high achievers from modest backgrounds. They were classmates at the University of NSW and had migrated between academe and the bureaucracy. And both had a tendency not to suffer fools or knaves.

To Henry’s frustration, McKibbin held sway on the board with his counter-argument that China was coming to the rescue, our banks were fine and the Reserve Bank’s previous big rate cuts, Canberra’s budget stimulus and the sharply lower dollar already had injected substantial stimulus into the economy. To hose things down, the board delivered one final compromise 25 basis point cut in the cash rate to 3 per cent in April, while taking note of rebounding Chinese steel production.

Stutchbury goes on:

Rather than drawing on McKibbin for being the one economist who got Australia’s crisis right, Swan banished him for being the economist who most clearly articulated where Labor had got it wrong. McKibbin dared to publicly criticise Labor’s excess public works stimulus.

When McKibbin’s term expired, Swan replaced him with one of his own former advisers, John Edwards. While a fine economist, this Labor insider is unlikely to go toe-to-toe in board meetings against new Treasury secretary Martin Parkinson.

This potential dilution of central bank independence is showing up in the financial market betting that the Reserve Bank will cut official interest rates before Christmas.

Great stuff from Stutchbury, who presumably, is tapping McKibbin as a source. But we’re going a bit overboard here. Pricing one rate cut by Christmas is a quite measured response in a volatile market given the risk of a looming European shock (which would render this entire post moot). The pricing of cuts began with the August equity collapse, not the appointment of John Edwards.

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But, Stutchbury is highlighting another potential point of perceived weakness for the RBA that the slavering horde I’m forecasting will attack. The constitution of the RBA Board, which has served it so well over the past 18 months, is about to come under sustained assault for rate cuts. Time will tell if they’ll man the keep or join the revolution.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.