Yahoo Finance Hypocritical RBA 'overlooking' key factor to cut interest rates: 'Obvious'
Inflation will hit the Reserve Bank's target and they need to act.
There is a noisy and seemingly influential cohort in the economics community in Australia that is full of inconsistency and hypocrisy. The latest incarnation of this is the role of government policy in managing the economy.
One of the cheerleading groups of this potpourri economics is the Reserve Bank of Australia (RBA). It has struggled for consistency in its analysis of recent government policy.
The RBA is being egged on by a range of economists who have never been within cooee of economic policy, and who have objectives other than the well-being of the Australian population.
On the one hand, the RBA and its senior staff have been saying strong growth in public spending is boosting demand in the economy, and this is a factor why it is forecasting inflation to take so long to return to the middle of its 2 to 3 per cent target band.
The RBA assessment is that government demand is actually adding to inflation and this is why interest rates cannot be cut and why they could even be hiked.
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In effect, the RBA is saying that strong demand in the economy is driven by the government building productivity-boosting infrastructure, and employing workers in education or aged and health care.
These areas unambiguously have a positive effect on productivity and keep the economy near full employment when the private sector is in retreat.
On the other hand, the RBA says government decisions that cut inflation will be overlooked when it comes to interest rates, as they have only a minimal effect on its trimmed mean inflation hobbyhorse.
That's despite headline inflation hitting the RBA's 2 to 3 per cent target band in the September quarter this year — in part because of these government decisions.
In giving rebates on electricity, the federal government is giving financial assistance to the whole population to reverse oppressive cost-of-living pressures.
The fact that these government decisions mechanically lower the headline inflation rate is all but irrelevant to the RBA.
Huh?
How can the government influence inflation?
The RBA knows the inflation rate includes a myriad of items that are often influenced, sometimes a lot, by government policy decisions.
These include:
Excises on petrol, alcohol and tobacco
Government council rates and charges
Utility charges driven by policy setting (not supply and demand)
Public transport fares
Postage rates
Some education fees
Where does the RBA draw the line?
What is the role of government?
Every three years or so, the Australian electorate votes for politicians who will make up the parliament.
When we do so, we expect the politicians who form government to do the ‘right thing’ by us, the people.
In other words, making lives better within the constraints of budget settings, fairness and basic decency.
Think of the recent policies that the RBA and some market economists are so weirdly concerned about.
Boosting employment in sectors covering the care of older Australians, health care and education.
These obviously create jobs which is important in itself, but it also enhances a range of critical services the electorate wants.
No decent government would sacrifice these reforming benefits for the sake of a few interest rate cuts, if indeed that was even the trade-off.
To her credit, RBA Governor Michele Bullock did emphasise the government was doing the right thing with these policies, a point that some other economists have not acknowledged.
This broader issue is also relevant to the current electricity rebates.
When Australian households have been hammered with the most extreme cost of living pressures in three decades, the $300 electricity rebate being paid during the September quarter 2024 is fair and decent.
It also has the effect of lowering the inflation rate as the price we all pay for electricity falls.
Decent governments implement policies to help the people.
Of course.
Which all comes down to the inconsistent assessment of government policy.
If the RBA were to place a higher weight on the actual inflation rate — not the trimmed mean measure — it would be cutting interest rates like the bulk of the central banks around the world.
Inflation is in target and could fall further through 2025 as the economy limps along.
The RBA may change its tune in the months ahead.
I think it will.
The hard reality of the September quarter inflation rate coming in at 2.5 per cent or thereabouts, with the unemployment rate spiking above 4.5 per cent before year end could well be straws that break the RBA to deliver the rate cuts the markets continue to price in.
