Albania’s right to question central bank high priests

From 2015 until the arrival of the COVID-19 plague, the Reserve Bank’s interest rate decisions led to an inflation rate below its target of 2-3%. At the same time, as evidenced by weak wage growth, full employment has also not been achieved.

In 2020, Governor Lowe announced that the Reserve Bank’s decision-making would give more weight to written inflation rather than its inflation prophecies. Targeting its own false inflation prophecies has led the Reserve Bank to keep interest rates too high for too long.

If the Reserve Bank’s strategy is to lecture the inflation rate down, it might work without doing much economic damage.

Then-Deputy Governor Guy Debelle acknowledged this in 2021, saying the higher rate on long-term Australian government bonds was “contributing to a higher exchange rate, which was holding back the recovery of the economy.” ‘Australian economy’.

In 2020, the Reserve Bank reluctantly joined the international quantitative easing club, a sort of wedding party at Cana. By buying bonds on the secondary market, it sought to keep the yield on three-year bonds at 0.1%.

In the face of a pandemic of incalculable severity and duration, the extremely expansionary monetary policy of the Reserve Bank was justified. He helped save Australia from a prolonged and brutal recession.

But now that inflation is on the rise, the Reserve Bank not only necessarily broke its 0.1% pledge, but also raised the cash rate by 1.25 percentage points in just nine weeks – the fastest climb in nearly three decades.

Governor Lowe is signaling that the Reserve Bank could double the cash rate in the coming months, suggesting the neutral rate is “at least 2.5%.” A rate hike on Tuesday is inevitable, likely taking the spot rate to 1.85%, on track to hit 2.5%.

This abrupt tightening of monetary policy is justified by the rapid rise in inflation and fears of a 1970s-style wage and price explosion.

But as Christopher Joye reports, Commonwealth Bank (CBA) data, based not on prophecy but on actual wages paid into around 300,000 bank accounts, suggests wages are growing at around 2.5% a year, which is hardly an explosion.

In addition, ABC economists explain that, taking interest charges and principal repayments into account, raising the Reserve Bank’s cash rate to 2.5% would reduce the cost of servicing the household debt at around 2008 levels, when the cash rate was 7.25%.

The forecast indicators for the Australian economy are on the downside. The OECD Composite Leading Indicator for Australia suggests a more pronounced slowdown for Australia than for the US, Britain and the OECD as a whole.

The ABC argues that the Reserve Bank does not face a price-wage spiral as it does in some other countries. He had previously thought the Reserve Bank would gradually raise the cash rate to 1.6% by February 2023, which he considered the right policy path.

The International Monetary Fund lowered its growth forecast for Australia, the region and the world, while the United States recorded its second consecutive quarter of negative economic growth – contrary to the expectations of the Federal Reserve Chairman , Jerome Powell.

Australia’s inflation rate could turn negative next year as petrol prices fall and supply chain pressures ease.

If the Reserve Bank’s strategy is to lecture the inflation rate down, it might work without doing much economic damage. But if he intends to slay the weary dragon of 1970s price and wage inflation with steep interest rate hikes, he could inflict terrible damage on consumers, workers and businesses.

Prime Minister Albanese has a legitimate interest in the conduct of monetary policy, as well as in fiscal policy. He, Treasurer Jim Chalmers and Finance Minister Katy Gallagher have a monumental task in reducing budget deficits and beginning to pay down nearly $1 trillion in inherited debt, as Chalmers explained last week.

Albanese is within his rights to avoid those who demand that he take a vow of silence on monetary policy. He is unlikely to engage in running commentary, but it is reasonable to suggest that the Reserve Bank is careful not to go overboard and cause unnecessary hardship to mortal Australians.

Michael J. Birnbaum