Macquarie Bank’s interest rate strategist, Rory Robertson, has taken former Opposition Leader Dr John Hewson to task in his latest email newsletter:
If you hang around for long enough, you’ll end up seeing things you couldn’t have forecast in a pink fit. How about this one? The bloke who campaigned for an inflexible 0-2% “electric fence” targeting regime in the early-1990s (“Fightback!”) now is at the front of the queue demanding the RBA ditch its flexible 2-3% inflation target, for something softer.
In The Australian Financial Review on Friday, former Federal Opposition Leader Dr John Hewson argued that there is “nothing sacred or magic” about the RBA’s 2-3% range and that now is the time to let it slide to 3-4% or whatever (p. 82).
Preferring inflation fights this century to be painless, Dr Hewson argued – as he did late in 2006 – that the RBA already has hiked rates “too far”. Furthermore, it “wouldn’t take too much more of the mismanagement by the RBA and the government” for the Australian economy to follow the US economy into recession.
Get Crikey FREE to your inbox every weekday morning with the Crikey Worm.
Showing little understanding of how the RBA’s flexible medium-term approach actually works, Dr Hewson’s opening paragraph reads as follows:
It’s ridiculous that we find ourselves in the position that, if the next inflation number deteriorates, the Reserve Bank of Australia will be almost morally bound to raise interest rates yet again in an attempt to bring the inflation rate back to within [sic] its 2 to 3 per cent target range – even though that would be significantly detrimental to our economy, and perhaps even to the stability of our financial system over the next 12 to 18 months.
In fact, the whole point of having a flexible targeting approach – rather than the silly 0-2% “electric fence” approach Dr Hewson wanted to saddle us with – is that policymakers retain discretion . That is, the RBA always is able to make judgements, to choose a sensible response to incoming news on activity, inflation and financial stability; policymakers never are on “automatic pilot”, forced to respond to incoming inflation news in a particular way.
Happily, the RBA was smart enough never to allow itself be “bound” – morally or otherwise – to do anything with interest rates that it can’t easily defend. In particular, there is no Q1 inflation result on 23 April that would force the RBA to raise rates in May.
Signs that tight financial conditions are biting into domestic demand – at least Dr Hewson got that bit right – are one of several factors that very likely will keep the RBA on-hold in April, May and beyond.