Former governor Ian Macfarlane has joined the RBA easing debate, via the AFR:
“When countries introduced inflation targeting 20 or 25 years ago, they never envisaged a world where inflation was so low that it was below all major countries’ targets,” Mr Macfarlane, who was the first to formally announce the target when it was adopted.
“The RBA has always prided itself on having a more flexible – as opposed to mechanical – inflation targeting model than other countries,” Mr Macfarlane said.
“Now they need all the flexibility they can muster, and I am sure they know that.”
…”Their problem [at the Reserve Bank] is that financial markets, particularly offshore, assume a mechanical application of what they regard as the standard model,” Mr Macfarlane said.
“The inflation targeting approach says that if inflation forecasts are below target, we should run an easy monetary policy – we already have that,” Mr Macfarlane said. “It doesn’t say that each time we receive an inflation statistic showing it is below target, we have to cut interest rates.”
So the bank cut because if it didn’t then the dollar would have risen which is exactly what should happen. It might be argued fairly that markets are over-sensitive to the actions of central banks now but that’s not really their fault is it? That’s the result of other central banks fighting a global currency war. And in that context, markets were quite right to expect an RBA cut, as well as plenty more.
All of this jibber jabber coming from former governors and board members about inflation targeting is really quite beside the point. Lowflation is dominant everywhere owing to peak credit, demographics, output gaps and the rise of emerging market production. As well, fiscal policy is largely constrained by high debt and monetarist doctrines.
In that environment, central banks are going to cut rates and keep on cutting as disinflation and deflation take hold. If their mandates are to maintain price stability, even with some flexibility, then they have no other tool nor choice. Wringing your hands about it is useless.
That’s where the world is. That’s where Australia is going, just one cycle behind. And, ironically, whining about it will only make it worse, as markets will read that as a hesitation to cut rates, raising the dollar and squashing inflation even further, hiking your real interest rate and crushing inflation again.
What Australia needs is a practical debate about how to handle this changed context. Former governors and pundits appear paralysed by the old frame of reference when what the RBA needs desperately is a new lens that takes account of secular lowflation, currency wars and possibly even the end of the private creation of money. This is the new secular context of global monetary policy, what Paul Krugman would describe as “depression economics”.
Australian monetary policy needs a much more vigorous debate about the changing cyclical and structural nature of Australian economic growth drivers. It needs a much more realistic assessment of the historic context in which it is operating. The GFC was not a “North Atlantic” crisis. It was global and it was an epochal inflection point. Australian household debt is not sustainable. Our banks are not different. The limits on external imbalances have changed. Deflation is the new inflation. China is not going to save us or anyone else. Forward guidance, macroprudential, asset price targeting are all a part of the new monetary tool kit worldwide.
Hopefully Phil Lowe can bring an intellectual Spring to the bank. If I were him, I’d do it openly, via symposia, the moment he gets the top job, rather like Mark Carney does at the Bank of England. The morons in the Parliament aren’t going to do it.
If he doesn’t, and he isn’t prepared, then crisis-strewn reality is going do it to him.
