vested interests

There was actually some news from yesterday’s RBA board decision yesterday — not the inevitable decision to leave interest rates unchanged (two full years after its last move, a cut to 1.5% in August 2016), but a sharp downgrade to the bank’s inflation forecast, in the post-meeting statement by RBA governor Philip Lowe.

That normally would have appeared in Friday’s third Statement of Monetary Policy for the year, but the bank appears to have decided to launch a pre-emptive strike, possibly to try and dissuade the markets from pricing in a rate cut rather than a rate rise as the next movement in monetary policy.

“In the interim, once-off declines in some administered prices in the September quarter are expected to result in headline inflation in 2018 being a little lower than earlier expected, at 1.75%,” Lowe said in his statement. “A little lower” is being a little disingenuous: the May Statement of Monetary Policy contained a forecast for 2018 inflation of 2.25%. The new estimate of 1.75% is a significant slowing on the part of the bank, and indicates it expects that the CPI in the current and December quarters will be closer to 1.5% than the 2.1% it was on a CPI basis in the June quarter.

Let’s hope that really is a once-off and inflation doesn’t slump again — although at least that would hand workers a real wage rise. Nothing else looks like doing that currently.

The change further increases the chance, hitherto small, that the next interest move will be down, not up. The AMP’s chief economist Shane Oliver, who has been ahead of the pack in picking the RBA’s reluctance to lift rate, said yesterday it could be another two years before rates rise and he argues “the risks are rising” that we could get a rate cut before then. “The next move is probably still up but not until second half 2020 at the earliest and there is a rising risk that the next move will actually be down … So despite relatively minor periodic moves in bank mortgage rates (with funding cost pressure pointing to a small rise at present) and deposit rates, the broad outlook remains for bank interest rates to remain low for an extended period.”

This leaves the monetary policy galahs at the Financial Review ever more adrift from reality. There was another ridiculous attack on the RBA today from chief squawker Warwick McKibbin, titled “It is not the RBA’s job to pick winners and losers”, which is not a line by McKibbin or his co-author but a Fairfax sub, who entirely missed the point: the RBA’s decisions — even decisions not to move rates — inevitably create winners and losers, because that’s how monetary policy works.

McKibbin, once an RBA board member, appeared to actually attack the bank for its independence. “Should the RBA as an unelected policymaker make judgments about what is and isn’t in the interests of the Australian people?” he wondered, arguing its independence “raises fundamental issues about the institutional design of independent agencies and how to deal with questions about democratic legitimacy and accountability.”

Remember that central bank independence is a hallmark of neoliberal policymaking, introduced in Australia by Peter Costello. Strange that McKibbin now has an issue with it when the bank is steadfastly refusing to embrace his neoliberal agenda of punitive rate rises. His article is a variation on the Fin’s recent editorial calling for a moving of the goalposts on inflation targeting so that our current low rate would suddenly be redefined as galloping inflation and require higher rates. McKibbin himself wants nominal income growth targeted instead — an idea that has been demolished by more credible authorities.

Or maybe we could just abolish “unelected policymakers” of the RBA and outsource monetary policy to the Financial Review? Of course, the Fin would probably go under in the ensuing recession, but neoliberal policy purity is surely more important.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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