Like a fish out of water, the Reserve Bank (RBA) continues to flap around, lurching from one policy extreme to the other, all the while missing its most basic objective of having annual inflation broadly between 2 and 3 per cent over the course of the business cycle.
And so it was with the interest rate hike last week, which shocked markets and forced even the best private-sector forecasters to change their view about the likely stance of monetary policy over the next few months.
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The RBA wants to engineer something close to a recession - certainly in per-capita-GDP terms - to achieve its inflation target while, just a month or two back, it was indicating that a cautious approach would help it tread the path between decent levels of economic growth and job creation – a soft landing in other words - and meeting the inflation goal.
The startling thing about last week’s action is that, even with the shock interest rate hike and aggressive outlook for several more near-term hikes, the RBA was unable to produce a forecast that inflation would return to target.
This is odd.
By the middle of 2025, it is expecting inflation to still be 3 per cent, even though there will be two years of zero per-capita-GDP growth and there will be an extra 100,000 people added to the ranks of the unemployed.
Either the RBA’s inflation forecast is woefully pessimistic or it is about to crash the economy into an unwelcome and unnecessary hard landing.
Lowe's track record
Until Philip Lowe became governor in September 2016, the RBA had a very good track record, hitting its inflation target over the course of nearly 25 years.
The times when it spiked above or below the 2-3 per cent target were generally short-lived and monetary policy settings were set squarely with the target in mind. The RBA acted quickly to fresh news with decisive and pragmatic changes in monetary policy settings, moving interest rates often unexpectedly as news evolved on growth, the labour market, global conditions and, of course, inflation.
Under Lowe this changed. A quick fact check of RBA inflation targeting during Lowe’s tenure presents a picture of unrelenting failure.
When he took over, inflation was a little below target and his predecessor, Glenn Stevens, had the month before aggressively cut interest rates to what were a then-record low of 1.5 per cent.
On assuming the governorship, Lowe left official interest rates steady for three years, despite the fact that, quarter after quarter, inflation was below target and, month after month, the unemployment rate was high - above 5 per cent. And this was in the face of an unrelenting deceleration in wages growth.
The results were devastating. Growth was weaker than need be, unemployment higher than need be and Lowe was a willing accomplice to the erosion of living standards through wage oppression.
In terms of the inflation performance, which is a foundation stone of the RBA’s operations, it is a shocking legacy.
From the time Lowe assumed the role as governor, right through to the March quarter of 2021, annual inflation was within the 2-3 per cent target for just two quarters when it touched 2.1 per cent and 2.2 per cent.
Lowe refused to cut rates for much of this time for a range of obscure reasons, including his assessment that lower rates would cause financial instability and that he preferred to ‘lean against’ house price gains with tighter monetary policy. He failed to ease monetary policy despite the fact that, through the bulk of this period, the RBA was forecasting inflation to remain below the target.
In summary, it was just two 'hits' of the inflation target in these four-and-a-half years with all other annual inflation readings below 2 per cent. Clearly, policy was too tight for too long.
In the more recent period, from the June quarter of 2021 to date, there have been zero times inflation has been within the target.
Ouch. Worse still, based on the latest RBA forecasts, inflation will not reach the target until at least the middle of 2025.
In total, this is five more years of missing the inflation target. This time all those misses are on the top side.
It is important to recall that Lowe was slow to hike rates in 2022, after signalling his confidence that inflation would not be sustainably within the target until 2024. We all know that horrendous error.
Out of a total nine years - including the immediate period after Lowe leaves the RBA in September 2023 - inflation will have been within the target for just two quarters out of a possible 36.
Just 5.5 per cent of the time.
What a dreadful track record and legacy.