The RBA is the best central bank in the world. Which other central bank can say that it has presided over more than 22 years of uninterrupted growth? Which other central bank can say that it has had the guts to intervene when unionised wage claims look like getting out of hand or when the property bubble got going in 2003? Who else can point to speeches delivered in the heady days before the GFC warning of troubles that may arise in the road ahead? Who else, when Mining Boom Mark I caused inflation to slip anchor jacked rates up quickly to cut it off but had the flexibility to reverse course when markets all but shut down in 2008 taking Australian official rates to modern day lows?
Asked and answered it was out own RBA – the best central bank in the world.
But the halo slipping, the RBA is showing itself to be a good steward of the Australian economy but hardly the Delphic Oracle that we once might have thought they were.
Frightened by the inflation pulse that accompanied Mining Boom Mark I the RBA went onto a war footing in 2010 and 2011 as the second great mining boom drove our terms of trade to all-time highs. Frightened by the very low unemployment rate they set about explicitly squeezing Australian households to make room for the mining boom. No apology, no by your leave, just simply get out of the way there is a boom on and you households over there need to pull your heads in.
Australian households might have put on too much debt in the run up to the GFC, they may have been sucked into, uniquely amongst the developed world consumers, taking on even more debt in the depths of the GFC by the fiscal stimulus and the first home vendors grant but they are not stupid.
They knew a global catastrophe when they saw one. They knew that all that debt needed to be repaid and they sensed that they would be unlikely to repay the debt by simply cashing in and selling the family or investment property at some time in the future.
So they did exactly what the RBA had explicitly asked them to do and implicitly forced them to do when it hiked interest rates and threatened to hike more, they increased their savings rate and did not consume anywhere near what could have been expected on the basis of income growth alone at the previous multiples of saving.
But if the RBA was pleased it never showed it. Rather like old generals the RBA was fighting the last war, worried about an breakout in inflation not only did the RBA tighten but they continued to signal more tightening. The Statement from the Governor of the RBA back in May 2011 was taken to signal more tightening on the way but they signalled that they were worried about an uptick in inflation and this was reinforced by the Statement on monetary policy released on May 6th which said:
The central outlook sketched above suggests that further tightening of monetary policy is likely to be required at some point for inflation to remain consistent with the 2–3 per cent medium-term target. In the challenging economic environment that is likely to lie ahead, the Board will set policy to ensure a continuation of the low and stable inflation that has made an important contribution to Australia’s strong economic performance over the past two decades.
The commentariat had a field day – extrapolating rate hikes to infinity and scaring the pants off Australian households. We off course know that they never came and only 6 months later the RBA was cutting rates by 0.25% to 4.50%. It has now cut them to 3.5% and many believe that further rate cuts are still in the pipeline.
But are they?
Having cut 75 basis points combined in May and June, even adjusting for the lack of 100% pass through as the banks rebuilt their margins, the RBA could hardly have been expected to rush back with cuts this month or next. Save for a catastrophe in Europe monetary policy just doesn’t work this way – there is always a lag.
But what is stark contrast in yesterday’s Minutes is a comparison with the language that saw them use to cut rates just six weeks ago to the lowest level in Australian history (save for the 2008/2009 extreme stress period). In June the RBA noted that the arguments were finely balanced but that there were softer global conditions in prospects and uncertainty about Europe’s future which had increased materially. This lead them to say that:
“While spill overs had been limited thus far, there was a reasonable likelihood that the tendency toward precautionary behaviour both abroad and at home would intensify. Given this, and with inflation expected to remain in the lower part of the targeting range over the next year or so, members considered that there was scope for monetary policy to be a little more supportive of domestic activity. Members judged that a reduction in the cash rate of 25 basis points, combined with the earlier reductions, would mean that monetary policy would be providing a measure of stimulus that would be expected to flow through to the domestic economy over the coming months.”
Yet just a month later the Minutes to the July RBA meeting paint a picture of a central bank that has flipped on a dime and is as prone to the vagaries of the data flow as the most junior analyst in a way that has not been in evidence in the past.
…with a material easing in monetary policy having occurred over the preceding six months or so, and with recent signs that the domestic economy had a little more momentum than had earlier been indicated, members saw no need for any further adjustment to the cash rate at this meeting.
Monetary policy that was “little more supportive” has somehow morphed into “material easing” and while one can’t quibble with the supportive nature of the cash rate, the rate paid by borrowers is nowhere near as low in terms of history as a 3.5% cash rate would imply due to the banks’ margin expansion.
Like many in the economics fraternity the RBA have been assailed by the ebb and flow of expectations and of data. They initially missed the change in household behaviour preferring to believe it was transient and spending would come back with gusto. They were focussed on the Mining Boom and the inflationary pulse that occurred in 2008, expecting it to be replicated in 2011. When neither of these views proved correct they reappraised their view and cut rates 1.15% over a relatively short period of time. Now it seems they are flipping the view once again.
J.M. Keynes taught us that when the facts change we should change our mind. And perhaps the RBA is simply following its pragmatic dictum of “do no harm” to the Australian economy and is signalling its thoughts to the wider public.
But in lurching around month to month, the latter is inevitably causing the former anyway.