Yes, the dogs are barking that the latest CPI figures will deliver an interest rate cut this month after the election. Michael Pascoe is wondering about the dogs that didn’t bark earlier within the RBA.
The Australian Bureau of Statistics has shouted that the Reserve Bank of Australia was wrong not to trim interest rates at its April 1 meeting.
The funny thing is, the RBA itself back in February forecast that ABS verdict.
The dogs are barking that rates will be trimmed on May 20, a couple of weeks after the election. The mystery for me is why the dogs didn’t bark within the RBA much earlier.
The most impressive figure to come out of Wednesday’s ABS figures hasn’t been highlighted but it was quickly spotted by independent economist James Foster:
“In 6-month annualised terms, core inflation is sitting right on the midpoint of the RBA’s target band at 2.5%.”
As anyone other than the RBA board members can see, six-month annualisation of the trimmed mean has unsurprisingly proven to be a very nice guide to where the full year number is going.
A couple of major points about this:
Backward looking
Firstly, the RBA claims to be “forward looking”, as it should be given the lag with which monetary policy works. It also claims to be “data driven”. On the evidence of the data, I call bullshit.
Putting aside the way the bank has ignored its actual mandated target of the CPI, only caring about the trimmed mean measure, you’re not forward looking when you have inflation hitting the very exact target with monetary policy still restrictive, still tightening. It means you’re backward looking.
RBA “data driven” que?
As for being “data driven”, the bank has been ignoring the data. The best guide to what has been happening with inflation has been the monthly CPI numbers which have shown since September that the trimmed mean was within the two-to-three per cent range with the trend heading in the right direction.
Secondly, and this is the strangest bit, the RBA itself back in the February statement on monetary policy effectively forecast that the six month annualised trimmed mean would be 2.5 per cent now.
So the bank ignored the data and its own forecast in considering interest rates on April 1.
The conspiracy
I’ve been wary of giving any credence to suggestions of a political dimension to the RBA’s decision making, the idea of the bank not wanting to be seen to be giving Labor a hand by cutting rates at the meeting before an election. Back on April 1, Labor was not being tipped to win the election.
Could an institution that had been battered by Jim Chalmers’ dubious review be more than a little gun shy, be wary of doing anything that might put it offside with a new government, would prefer to play it safe by sitting on its hands until the next meeting, even if only subconsciously? After all, waiting for the next meeting is neither here nor there for the RBA board.
Crypto tip-toe: Jim Chalmers suddenly looking a tad desperate
It’s not impossible, though I prefer to think it’s more a matter of the bank being timid. To use a phrase I think I might have coined, it’s a matter of the bank lacking the courage of having convictions.
Trumpmania syndrome
On top of its own February forecasts and fresh data, the bank’s last meeting also had forecasts from the world’s major economic bodies that Trumpmania was going to weaken the Australian and global economies. That’s the sort of thing that should have increased the call for a rate trimming, to actually look ahead rather than behind.
But, no, the RBA dogs didn’t bark. A mystery.
As posited here in February, if the election was to be a close-run thing, it would be rich if Chalmers’ RBA review was to cost Labor government, given how that review was obviously deficient on several fronts but enthusiastically adopted in full with undue haste. (https://michaelwest.com.au/pascoe-how-the-rba-got-it-wrong-on-interest-rates/ )
Failing to act. RBA caught in the headlights of uncertainty.