The RBA needs reform not more corruption

Via AFR:

Former Reserve Bank of New Zealand governor and architect of its inflation target band Don Brash has cautiously come out in favour of Australia reviewing its inflation target due to persistently lower levels of inflation.

“It makes sense to review it,” he told The Australian Financial Review.

“But I have mixed feelings about how that might change.”

Sure, let’s review it. But not just the inflation target. The entire monetary management system is broken:

  • does RBA or APRA now control monetary policy?
  • do they operate effectively together or, as evidence suggests, in a void of diffused responsibility?
  • why is inflation so low?
  • what role did the RBA play in making it so?

If we just pick out the inflation target for review, to lower it, then we’re shifting the goal posts to protect RBA failures after the fact. This is corruption. It is made worse by the fact that the Bank has been FAR too bullish for years, so what other lowflation outcome should we expect if it’s holding policy too tight?

It’s bleedin’ obvious what went wrong with inflation. As Professor Ross Garnaut noted yesterday, the RBA tracked the wrong labour market indicator in looking for wages growth (and therefore inflation follow through) while celebrating unprecedented inflows of cheap foreign labour into an output gap. Phil Lowe himself has said he needs wages growth of 3.5% to keep inflation above 2%. It should have been looking at underemployment not unemployment, a point made very clearly today by ANZ:

“We are forecasting a gradual pick-up in wage growth to 2.4% by the December quarter.”

“This is dependent on our expectation that the unemployment rate will track sideways at around 5%.”

“Any rise in the unemployment rate would stifle the slow progress that wage growth has made over the past couple of years.”

“Earlier this decade, an unemployment rate of around 5% was associated with wage growth of close to 4%, according to the Phillips curve.”

“This relationship has changed drastically — the unemployment rate is back at 5% but wage growth is only 2.3%.”

“We believe that a structurally higher underemployment rate is to blame. This has resulted in the unemployment rate becoming less reflective of spare capacity in the labour market”.

“As underemployed workers are those that are actively looking and available to work more hours, they tend to be part-time workers.”

“Underemployed workers may be more likely to accept additional hours at their current wage rate, rather than push for a pay rise, restraining overall wage growth.”

“For wage growth to continue to improve, and for it to get anywhere near the long-run average over the longer-term, we see a sustained, material decline in the underemployment rate as the key requirement.”

The RBA has gone rogue with a deflationary mindset. Any review of its mandate must focus on why, and target a shift from employment to underemployment in its mandate. Forget the inflation target.


  1. Any review of its mandate must focus on why, and target a shift from employment to underemployment in its mandate. Forget the inflation target.

    Edit: I missed this last sentence. RBA has no control over the systemic wage suppression.

  2. How can the labour market tighten if every time it looks slightly close to doing so, out government caves to cries of “SKILLS SHORTAGE!” ?

  3. The first thing that has to be done is to review what “independent” means. It is not in the public interest to have the RBA employees as rusted on associates of think tanks such as the Institute of Public Affairs – or any think tank for that matter. If the RBA is to be independent it actually has hold ideology at arm’s length and have a clear charter of what interests it serves. It was a very bad idea for government to outsource monetary policy to those with a vested interest in revolving door outcomes. Originally, that was justified by the idea that bankers are moral, bound by codes of ethics, unwilling to be ‘self-destructive’ and that government regulation was unnecessary. Today, it is patently obvious that this was a PR myth peddled by those with their snout in the trough. Government needs to assure that public scrutiny of the RBA is increased and that a code of professional conduct enforced so that the revolving door is welded shut – despite the bitching and moaning.

  4. What’s the point of an inflation aim when it doesn’t measure what people spend money on? Housing should be 30% of inflation.

    • Exactly, a house is the biggest purchase most people will make in their lifetime, people spend 30-40% of their monthly income on it. Not including it as inflation is ridiculous.

      It’s just for the fact that our debt system needs continual growth in debt to survive, to do that you need to lower rates and that produces inflation, it always has and it’s just hidden in housing/stocks where the immediate leverage is first pushed into our system.

    • Housing is an asset and not a consumer good. If we included that 30-40% of incomes spent on servicing home loans, we would have issues of circularity in meeting our inflation targets. ie. higher interest rates lead to inflation in servicing home loans, pushing inflation above its target, which leads to the RBA increasing interest rates even further etc etc.

      Including the price of housing in the CPI would be a mistake. I think the solution to what you’re (rightly) worried about is to include imputed rents by owner-occupiers in CPI (which are currently excluded). Imputed rents are effectively rental payments made by owner-occupiers to themselves. They’re included in GDP calculations, but not CPI, for some reason. This effectively underweights housing in CPI.

      Had it been included in CPI, imputed rents would have seen much larger rate hikes during the boom times, but also they’d now be showing lower inflation than is currently printed.

    • DominicMEMBER

      It is a prize pile of nonsense but no matter how many times it appears to ‘not work’ the ever incurious economics establishment refuses to question it’s veracity.

    • The Phillips Curve is not bunk. It was designed at a time when the unemployment rate was indeed an effective indicator of slack in the labour market.

      With rising workforce casualisation, the better measure is underemployment and underutilisation. It has been for a long, long time, but the old blokes at the RBA havent brushed up their skills since the 1970s.

  5. Lowering the inflation target is silly. As Japan shows, you have persistent low inflation, you will get stuck at the zero lower bound in a recession and then have a collapse in nominal GDP growth and budgetary problems. We need inflation to return to the 2-3% range and the RBA needs to pursue a policy that achieves this.

    In a small open economy with a floating exchange rate, to say you can’t achieve the target is bull.

    • Cutting rates at the level they currently are in Australia, even all the way down to zero, and taking into consideration what’s happening with real estate prices won’t do a damned thing for inflation unless the banks return to reckless lending again – which funnily enough is exactly what Frydenturd was pushing for. Australia really has got itself into a catastrophic mess thanks to it’s years of real estate mania.

    • DominicMEMBER

      To be fair, the Japs have been trying to hit the hallowed 2% target for nigh on 30yrs now, which I’d posit says one of three things:
      1. Japanese central bankers are incompetent, or
      2. Central bankers really aren’t able to control the inflation rate at all, or
      3. The whole concept of inflation (as defined by neo-classical economists) is actually nonsense in the first instance.

    • DominicMEMBER

      In their defense the RBA hired a non-English speaker to draft the text. Well, why wouldn’t you when they’re so very cheap and plentiful these days.

  6. Even StevenMEMBER

    The RBA turkeys have fluffed it.

    does RBA or APRA now control monetary policy?

    APRA. RBA has almost hit their lower limit (absent unconventional policy). APRA has more control over credit growth and can channel it more productively (but they probably don’t know how).

    do they operate effectively together or, as evidence suggests, in a void of diffused responsibility?

    The responsibility is the RBA’s. But they no longer have the tools (and arguably created this mess egging on the house price boom).

    why is inflation so low?

    Demand less than supply. Probably caused by growing inequality resulting in lower propensity to spend (except on houses, artworks, collectable cars).

    what role did the RBA play in making it so?

    A huge one. Apparently ignored the composition (quality) of growth in the economy. Ignored productivity. Ignored underemployment. Ignored vulnerability from excessively high house prices.

  7. Proof that even central banks couldn’t have imagined how successful we would become in engineering a massive, voiceless precariat.

  8. SweeperMEMBER

    Ok just for context: Brash is an unreconstructed neoliberal ideologue, whose lasting legacy to the world will be the insane period of inflation targeting (synthetic gold standard) – which he kicked off in the late 80s early 90s, which has driven the world into a zero rate trap, negative bond yields, devastating unemployment, growing public debt, removal of trust in economic policy makers and economics more broadly (to the point where crazy ideas like MMT get a look in) – exactly as the last gold standard did.
    The last thing anyone should do is lower their inflation target unless you want a permanent deflation lost decade.
    How about abolishing it or increasing it to 5%.

    • Pfh007MEMBER

      “..Brash is an unreconstructed neoliberal ideologue..”

      Bizarrely that will still be a compliment in mainstream Australia regardless of who wins the election.

      Inflation should always be a concern.


      Because healthy economies have inflationary pressures that drive a search for greater productivity.

  9. Couldn’t have put it better myself. In fact, I could’ve written this almost word for word!

    But let’s not be too harsh. We really should cut these clowns a bit of slack given they only discovered total under utilisation in August 2016 …

      • They first used the the word underemployment in an official document (nor had I ever heard them utter the word in person or in speeches either). Believe it was an SMP. Needless to say, it was only at this time that the local economics community began to focus on it (nice catch, people .. sigh), seemingly oblivious to the fact that it had been a) a problem for years, and b) a key determinant in the underwhelming post-GFC trend in domestic demand.