Lunatic RBA admits it’s “flying blind” on interest rates

Last month, CBA’s head of Australian economics, Gareth Aird, contended that the Reserve Bank of Australia (RBA) was “flying blind” on interest rates given it typically takes between two and three months before increases in the official cash rate (OCR) hit mortgage holders.

Separately, Aird cautioned that the RBA’s aggressive monetary tightening is “like having five shots of vodka in an hour and saying, everything is OK. But you know that it will soon have a big effect”.

Hilariously, Wednesday’s speech by Assistant Governor (Economic) Luci Ellis admitted the RBA has no idea and is indeed “flying blind” on the neutral OCR, which she argued is around the current level of 2.6%:

Dr Ellis described the neutral rate as the RBA’s “pole-star” to guide decision-making but emphasised it was highly uncertain and policymakers could not know neutral with precision until well after it had been passed.

“Its location is sufficiently uncertain that we are perhaps better served by paying more attention to the ground as it shifts beneath our feet than to that faraway pole-star”.

“We need to be mindful of the limitations of our instruments, and of the prospect the stars themselves can realign. But as we navigate the narrow path to our intended goal, we welcome any faint light those stars may cast.”

Gareth Aird is rightfully skeptical, suggesting the RBA is looking at the wrong metrics by ignoring Australia’s world-beating household debt load:

“I think one thing Luci didn’t talk about was looking at it through the debt servicing lens, which is looking at what level of interest rates delivers what level of mortgage repayments as a share of household income,” Mr Aird said.

“Because the stock of debt is at a record high as a share of income, it makes sense that the household sector is incredibly sensitive to changes in the interest rate”, which have a “huge” impact on interest cost of debt.

Mr Aird highlighted that before the pandemic, the RBA had been forced to cut the cash rate to 0.75 per cent to stimulate economic growth, and the rate was now more than triple that level.

“I think we’ll end up with a cash rate in a deeply contractionary setting, which is why we think it will go down in the second half of next year.”

Luci Ellis pointing to the stars is hardly confidence inspiring, is it? Because it is clear the RBA will hike until it drives Australia into an unnecessary recession.

It will then be forced to cut hard from mid next year to undo the damage that it has caused.