Sunday, October 3, 2010


Terry McCrann wrote of the RBA on Saturday that:

The belief that it won't lift the cash rate on Tuesday is based on a fundamental misconception of what the RBA is trying to achieve and a misunderstanding of how and what it reads in the statistical tea leaves.

Simply, brutally, it is not trying to strike some balance between inflation and growth. Neither its mandate nor its operational perspective is symmetrical. It's always worse for it to not hike and things, as in inflation, pick up, than the opposite: to hike and to end up with slower growth.

This was noted by Australia's most idiosyncratic commentator Christopher Joye yesterday. Although he was talking more specifically of the asymmetry between undershooting and overshooting its 2-3 per cent inflation target.

This comment came in a rather pungent analysis of the RBA's actual performance over the last half decade that showed the RBA's "preferred" inflation measures had averaged 3.4-3.5 per cent over Glenn Stevens' term as governor. That's to say, above the top end of the inflation target range.

This blogger has nothing but respect for McCrann's record of predicting interest rate moves. But, simply, brutally, this is wrong. And it's wrong for two reasons. First, we are in a world with a shortage of demand, chock full of central banks hell-bent on getting local spending moving and debasing currencies.

Second, despite its independence, the RBA does not operate in a political vacuum. The history of our central bank, especially under Iain Macfarlane, who always seemed to have at least one eye trained on politics, suggests strongly that the RBA's asymmetric dynamic is one in which it is always easier to squib rises or cut than it is to take the hard yards on inflation.

As argued here last week, if Macfarlane had been less asymmetric, we would surely not today be facing such a grotesque housing bubble.

It has been this blogger's impression that Glenn Stevens is more focused where he should be. Consider, for example, his rate hikes in 2007 during the election and the 2008 commodities blow-off, as well as bold rises since the GFC. However, he faced significant resistance across the board on all three occasions and significant criticism afterwards on two.

All of the pressure is to keep rates low.

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