RBA: Reactive, anachronistic, stuffed

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The Reserve Bank of Australia is the slowest reforming central bank on earth. It is staid, reactive and sees itself as James Joyce did in Portrait of the Artist as a Young Man, paring its fingernails while waiting for the economy to signal its needs.

This was always something of a convenient fiction, used by central banks around the world to ignore asset bubbles and protect their independence. But the ruse serves as a very useful political foil so is not something that will be voluntarily cast aside in a nation where politics poisons everything.

Other central banks abandoned this fiction long ago and embraced “active” central banking as well as going so far as to provide “forward guidance” – a kind of open jawboning openly seeking to influence market pricing merely (but very effectively) by deploying the bank’s viewpoint. In the US this took the form of promises for low rates for extended periods and explicit macroeconomic trigger-points for shifts in policy, such as target unemployment rates.

Today we have a glimpse of the RBA’s attempts to get “active” itself, from John Edwards, the RBA’s Mr Rainbow via the WSJ:

“We’ve still got a rapid rate of growth of the workforce and GDP growth is just not quick enough to keep up with it. There is no doubt at this rate of 2.5 per cent, it is below the rate that is necessary to prevent a rise in unemployment,” Mr Edwards said in an interview.

“We’ve got to get to 3 per cent (GDP growth) at least,” Mr. Edwards said.

We don’t want to read too much into this, and there is clearly no open shift to forward guidance but equally there’s your object of policy loud and clear – faster growth to get the jobless rate down – and we can expect interest rates to keep falling until it is delivered.

Alas for the bank that will be a long time coming as mining unwinds jobs for two more years, the car industry collapses and the population ponzi brings in more people than it does demand.

And therein lies its inactivity problem. Edwards went on to say:

The last thing you want to see is monetary policy having a stimulatory effect in driving up house prices.

Well, Mr Rainbow, that’s what you’ve got. That’s what you chose, in fact, though the abortive nature of RBA self-framing is preventing you from doing enough to prevent it. Witness the last two months: a market shocking rate cut in February to hit the dollar and another market shocking rate hold in March as panic swells about property. He goes on at Fairfax:

“We haven’t yet seen the impact,” he said. “We haven’t seen how the APRA rules will start to constrain the rate of growth of investment housing [and] credit, particularly in Sydney where I think these constrains will be felt first.”

Dr Edwards said there had not yet been any impact from the government’s insistence that foreign investors in real-estate “actually following the rules.”

I agree they’ll have some impact but it’s far too little, too late. A point made today by David Murray:

“It’s just not the case [that] we’re immune from trouble here,” he said.

It would be a real concern if the cash rate was to fall to the 1 per cent range.

“In the post-crisis world we’re in, asset prices – with monetary easing – keep getting inflated,” he said, pointing to the high price-to-income ratio for houses in Australia.

“There only needs to be a noticeable pick-up in employment and this can turn very, very difficult… APRA and the Reserve Bank have a real problem here.”

There are plenty of excellent and correct arguments against active central banking in principle, most of which have been championed by the even less progressive Shadow RBA. But in an era when you’re the only one sticking to the old rules, you’re stuffed.

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.