There’s a couple of salient points in the Reserve Bank minutes from its decision a fortnight ago to leave the cash rate on hold — a “finely-balanced” decision that may, or quite possibly may not, have been influenced by the absence of economist Warwick McKibbin, retailer Roger Corbett and industrialist Graham Kraehe.

One is just how close a decision it was: “While the Board recognised that it could not wait indefinitely to see whether risks materialised, members judged that they had the flexibility to do so on this occasion.” The Bank still seems disposed to lift rates but the critical input seems to have been the lack of input, with the minutes noting the “relatively limited amount of data on the domestic economy” over the previous month and the mixed nature of the data it did have, particularly in relation to credit growth. The lack of data, particularly on the CPI, will be remedied by November’s meeting.

Another is the absence of any reference to the impact of government spending. Just yesterday, Shadow Treasurer Joe Hockey was claiming it was “the government’s own actions in continuing to run very large budget deficits and to “pump prime” the economy that is forcing interest rates to be higher than they would otherwise be…”. Hockey was speaking in the context of an otherwise sensible statement on the high value of the Australian dollar.

There are number of commentators who agree with him, and who back the Coalition’s call for a mini-budget to cut spending. There are calls from business, as well — although the first priority of corporate Australia in relation to the higher dollar is apparently more business welfare for exporters.

Let’s leave aside, for a moment, the problem that neither side has the guts to engage in any serious slashing of expenditure.

Unfortunately, the RBA doesn’t seem to agree. Its only references to government spending were to note its reduction: “Business investment was expected to strengthen over the next few years and to offset the scaling back in public investment. Domestically, members noted that the economy appeared to be evolving broadly in line with the Bank’s expectations. The outlook remained for public spending to slow but for private demand to pick up noticeably, particularly in the case of business investment.”

This has been going on for 12 months now — the Coalition and commentators insisting government expenditure is putting pressure on interest rates, the RBA steadfastly refusing to agree. “Interest rates would need to rise at some point if the economy evolved in line with the central scenario of a gradual tightening in resource utilisation, as this would most likely result in a gradual strengthening of inflation pressures,” the minutes say. That’s the RBA’s central message.

That won’t stop the ongoing efforts to blame the government for higher interest rates when they eventually arrive, but they shouldn’t be confused with serious economic analysis.

Oh, and in passing the minutes record that “members noted staff estimates that banks’ funding costs had been relatively flat over recent months”. Bear that in mind when the banking oligopoly next runs its lie that it needs to jack up rates beyond the cash rate.

Peter Fray

Fetch your first 12 weeks for $12

Here at Crikey, we saw a mighty surge in subscribers throughout 2020. Your support has been nothing short of amazing — we couldn’t have got through this year like no other without you, our readers.

If you haven’t joined us yet, fetch your first 12 weeks for $12 and start 2021 with the journalism you need to navigate whatever lies ahead.

Peter Fray
Editor-in-chief of Crikey