How big was the RBA’s 2011 miss?

There is a clear consensus at MB that the RBA got monetary policy settings right this year. They balanced the medium term structural forces of the mining boom against the temporary inflation spike caused by the floods and the weakness in the services economy emanating from falling house prices. Kudos.

However, the same can’t be said of their forecasts. On GDP, up until May, well after the floods, they were still projecting unrealistic GDP for the first quarter and the year:

On inflation, right up until last week they were still projecting a much higher headline CPI rate (though the corrections would have been sooner if the SoMP was monthly) :

The same is true of core inflation:

The main point I want make is that the RBA showed considerable integrity in ignoring its own forecasts and making monetary policy judgements based upon the much weaker data flow this year. In this vein I think we can all be grateful that less measured voices in the debate were completely ignored.


      • And where we would we have been without Graham Kraehe, Roger Corbett and the other non-economist, non-bureaucrat members of the board?

        I think Chris Joye might well have got his 2 or 3 rate hikes mid-year and we’d Australia would be in recession right now.

      • Curious to know how we can determine the voting patterns of the non-bureaucrats mentioned, or any members of the Board for that matter. Is this publicly available – a link would be appreciated.

        Second Chris Joye has been calling for rate increases prior to each meeting – for nearly 12 months rates have been stable and his call no different to a number of other ‘experts’. I had not realised he wanted 2 or 3 successive rate hikes (of say 25bp each)as Lorax informs.

        But good to hear we are not in recession right now…

  1. RBA forecasting has two jobs – and one of those jobs is as a driver of sentiment. Knowing this, wouldn’t all your forecasts be bullish too? Forecast the hope, make decisions on reality.

    • And jawbone the housing cult into submission via appearances on Sunrise. I liked that play.

      Bull**** the forecasts may have been but as you point out, sentiment is fragile and it’s better to be deceptive and keep everyone’s hopes up in the hope that people don’t panic and run too far the other direction.

  2. Deus Forex Machina

    I’d reckon the RBA should get some Kudos for the consistency of the process they follow – central tendency with an assessment of the risks around it.

    Forecasting is a mugs game – I hated it when I was doing the Currency Strategy thing full time – its difficult to make a point forecast of a level or value of something into the future when there are so many moving parts and when the actual forecast can impact on the outcome…

    I reckon the RBA has done a good job of adjusting their thinking in an iterative manner and then moved interest rates accordingly

  3. They were the voice in bad weather,that threatened to Raise at High-tide,that now eases it out,to a tidal-turning …creak
    Thanks Data Sword..JR

  4. Tassie TomMEMBER

    I think the RBA’s next revision of their forecast inflation will be up. I think that inflation will become a problem again, and the pressure on interest rate policy will be opposite to what the RBA would like to do to pick the economy up.

    Why do I say this?

    1) Bananas are now $2.99/kg at places. The fruit & veg prices don’t have much further to fall, so after this quarter, the fruit & veg factor won’t be continuing to moderate inflation.

    2) Have you been to the petrol station lately? Fuel prices are up and they are staying up, and these high prices are resilient to the Libyan conflict being resolved, and to Europe appearing to crash into recession. And they are high despite our high dollar. This has got to feed in to the price of everything, which in 2 or 3 quarters time will feed into an irresistible increase in underlying inflation.

    3) The terms of trade are dropping, and eventually the dollar will drop, and this will cause a one-off increase in the price of everything imported. It won’t push underling inflation up (except for the price of fuel), but it will make the headline price spike for 3 or 5 quarters, and this will worry everyone.

    So I’m guessing that bonds will underperform over the next 18 months, which may then be a good time to buy. But that’s what I’ve been saying for the last 3 years and I’ve been stone cold wrong.