Why Australians no longer trust the RBA

For the better part of a year, the Reserve Bank of Australia (RBA) stated it would be “patient” on lifting interest rates, and would not hike rates until annual wage growth surpassed 3%, which would signal that underlying inflation was “sustainably” within its target band, rather than temporarily imported on the back of supply-side shocks.

The RBA said that it would wait to see the actual wage growth data, rather than relying on expectations. This was an admission that the RBA had gotten wage growth forecasts horribly wrong over the prior decade, continually predicting a wage breakout only to see actual wages crater:

RBA wage growth forecasts

RBA wage growth forecasts always too bullish.

In mid-March, the RBA released its Minutes of the Monetary Policy Meeting, which once again pushed back hard against the notion that rate rises are imminent, citing that wage growth had yet to hit its 3%-plus trigger:

The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target band… Wages growth also remained modest and it was likely to be some time before aggregate wages growth would be at a rate consistent with inflation being sustainably at target. The Board is prepared to be patient as it monitors how the various factors affecting inflation in Australia evolve.

Specifically on wages, the RBA noted that they had only recovered to sluggish pre-COVID levels:

Wages growth had picked up, but only to around its pre-pandemic rate… Across industries and states, wages growth outcomes had been unusually tightly clustered in the low-to-mid 2 per cent range. While the share of jobs recording wage increases of 2–3 per cent had recently returned to around pre-pandemic levels, the share of jobs with wage increases above 3 per cent had been little changed in recent quarters… Surveys of unions’ expectations had also been consistent with wages growth of around 2½–3 per cent over the year ahead.

As we know, the RBA caved on its “patient” stance, hiking rates 0.25% last week without confirmation from this month’s Wage Price Index that wage growth has accelerated. Instead of relying on the actual wage data, the RBA instead deferred to the same business liaison that had prompted the RBA to erroneously forecast wage breakouts for the past decade:

Information from the Bank’s liaison program and other business surveys suggests that private sector wages growth has picked up in the past couple of months. While the majority of liaison contacts continue to report annual wages growth of 3 per cent or less, there has recently been a marked increase in the share of firms reporting average wage increases already above 3 per cent (Graph 4.20)… Liaison reports suggest that wages growth will pick up further over coming quarters…

Distribution of Wages Growth

To add further insult to injury, the RBA’s own forecasts do not expect Australian wage growth to exceed 3% until next year (Table via The Australian):

RBA economic forecasts

Therefore, the RBA has blatantly contradicted its previous assurances that it would wait to see actual wage growth before lifting rates, instead relying on the same industry expectations that had proven wrong for a decade.

What happens if next week’s March quarter Wage Price Index undershoots expectations and comes in soft? Will the RBA backtrack? Would it have killed the RBA to have waited another month to receive the ABS wage price data before hiking rates?

It is because of the flipflopping and faulty guidance surrounding rates that Australians no longer trust the RBA.

Unconventional Economist

Comments

  1. happy valleyMEMBER

    “It is because of the flipflopping and faulty guidance surrounding rates that Australians no longer trust the RBA.”

    It’s got nothing to do with flipflopping and all to do with self-interest.

  2. fitzroyMEMBER

    It would be better if the RBA did not exist and it was subsumed into treasury with a massive saving of public money. It represents the asset holders against the electorate with a fig leaf of “independence”. It would be a good thing to opt out of the international cartel of central banks.

  3. Agreed, I was sitting in a investment committee just last week and this point was made on RBA credibility. They could have stuck with the mantra of being data dependant and acknowledging that their models were off but instead they threw it out the window and reacted to consensus. Credibility was shot not just because data suggested they might have been wrong (still unknown) but on top of that, you went ahead and did exactly what you said you wouldn’t.

    I think this also tips the scales in favour of the MB view here, market pricing is factoring in an MIA central bank thus increasing the probability that the market has overshot in rate bullishness.

  4. Philip Lowe is clearly still using the ancient textbook and lecture notes he studied at university in the early 1980’s. He probably spends his evenings reading “The macroeconomic mix to stop stagflation”.

  5. SnappedUpSavvyMEMBER

    glen mumbles stevens lost me on the RBA 10 years ago when he threw my business and every other manufacturer under a mining truck the C%#@%$%&T

  6. Harsh reality for the RBA is that they cannot fight the fed or Chyna, they also cannot control the macro’s with their toolkit of interest rates. The RBA should not be meeting independently, it should make decisions with Treasury, APRA and ASIC in the room or merge all 4 entities into one government entity which looks at how all these different levers can be used to protect the currency and the people of Australia.

    Its a cursed position with little remit, considering the small scope they should not be getting it so wrong so regularly. If they were a business, they would be out of business.

  7. pfh007.comMEMBER

    “..It is because of the flipflopping and faulty guidance surrounding rates that Australians no longer trust the RBA…”

    Nah that is not the reason they no longer trust the RBA.

    Finally the penny is starting to drop with the public that, despite all the hogswash that has been spun over the last 40 years about the sacred nature of the high priests of the RBA, trying to manage an economy via monetary policy and a badly deregulated banking system is a fool’s errand.

    The big problem is NOT that the public no longer trust the RBA, rather it is that so many economic commentators still do trust the RBA and the whole broken model and insist on pretending that moving a few deckchairs around and tweaking a target rate at slightly different intervals is all that is required

    We need to stop rabbiting on about whether the target rate should have been raised this month or next month because it is NOT the issue.

    The issue is when do we start reforming a monetary system consisting of:

    * an absurd private bank monopoly over accounts at the RBA
    * a control mechanism that involves manipulating the demand for bank credit for something as important as shelter
    * a public guarantee over short term unsecured investments “deposits” in private banks.

    Get rid of the monopoly and allow all non-banks and the general public to open a ‘reserve’ account at the RBA.

    If people want some of their savings to be ‘risk free’ let them use their ‘reserve account’ at the RBA.

    If people want a return let them invest (transfer some of their reserve to someone else) and take some risk for that return. Their investments may include unsecured accounts at private banks but those investments will not be called “deposits” as clearly that word is not understood, by the public, to mean an unsecured investment in a bank.

    If people want to use the private banks payment systems because the ‘reserve accounts’ will not be designed as high volume day to day transaction accounts (at least not initially), they can operate a transaction account supplied by a private transaction company and pay the transaction fees that company charges.

    Make reserve accounts at the RBA the risk free zero interest core of the monetary system and allow everyone who wants one to operate one.

  8. The Statement on Monetary Policy a document of about 80 pages of mostly text, providing it with a sure defence against actually being read, is worth reading… Well at least their inflation section, which is in essence a long telegram admitting they mucked up.

    The core problem at the RBA is Phil Lowe’s lack of pragmatism. No one is omniscient and a bit more humility and flexibility would go a long way.

  9. Many people I met don’t trust the RBA for the opposite reason – if you’ve been looking for houses and seeing the amount of lending taking place and inflation (asset or otherwise) it is causing even agents were like rates were too low.

    The real reason trust was lost on the RBA is they promised to follow wages in the first place like they actually have control over such a thing even indirectly anymore. If they followed that guidance we would never get an interest rate rise to normality …. ever. Workchoices 2.0 and other changes over the decade or so have broken that transmission mechanism.

    Without a transmission mechanism more inflation is just a wage cut that funnels even more of the nominal GDP/money supply share to capital instead of labor as nominal GDP rises but wages stay the same.

    If the RBA doesn’t combat inflation purchasing power is lost by the “real economy” who can’t get the wage rises to make up for it. In the meantime their real wages are decreasing, houses are getting more expensive, and the “have’s” have access to cheap money. If they lower inflation at least the wage workers have already secured gets them further. People go to their supermarket, see the prices and don’t believe the RBA hasn’t pulled the trigger already!

    Given the large amount of real GDP going to capital/business vs labour over the past decade arguments against wage rises are starting to look quite thin. What we need:

    – Lower inflation via higher interest rates (i.e. a reasonable return on savings) AND
    – Wage rises taking a bigger share of the GDP left.

    Even if it doesn’t benefit me personally at all its probably a fairer system.

    • Well said and far more logical than the MB articles of late.
      Just because MB would like to see the AUD with a 5 handle doesnt mean thats whats good for Australian’s in general.
      And i am payed in USD so not talking my book unlike MB.
      MB has jumped the shark on the interest rate /inflation issue.
      And its incoherent with its political stance in many cases.
      Personally i am curious how far leveraged into real estate MB is. They dont like cutting land use regs either ive noticed.
      Feels like they finally embraced the australian economic zone way- self interest disguised as self righteousness. And” for the good of the community”.

        • So what do you have to say?
          I decided not to renew my subscription when they started campaigning for QE amongst other things too many contradictions on the economic front.
          I still agree with a lot of what DLS says politically

  10. Who asked for a massive debt bubble to be pumped in the first place?
    If it wasn’t for that arguments over 25bps here or there would be totally immaterial
    Lets pay a tarot card reader $40k/yr to set rates. Probably do a better job.
    The idea that boffins at some govt. organisation can predict the future is laughable.

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