Not content with causing unnecessary hardship for Australia’s most vulnerable, the Reserve Bank seems determined to engineer a general recession, only Australia’s second in the last three decades.
In its statement on monetary policy released last Friday, the Reserve Bank confirmed its intention to press ahead with further multiple interest rate increases, dashing earlier hopes that the February rise would be followed by a pause.
This dogged pursuit of reducing inflation at the expense of employment and real wages is in non-compliance with the law setting out the Reserve Bank’s charter. The Reserve Bank Act of 1959 obliges it to exercise its powers in such a manner as to best contribute to the maintenance of full employment and the economic prosperity and welfare of the people of Australia.
The Reserve Bank Act does not mention keeping inflation in the 2-3 per cent range. That target was agreed in a letter between the Howard government and the Reserve Bank in 1996. Yet the 2-3 per cent target is receiving higher priority at the Reserve Bank than the 1959 law enacted by the Australian parliament to govern its monetary policy behaviour.
Monetarists will argue that full employment cannot be achieved unless inflation is kept within its target range or is quickly returned to it.
But how quick must a return of inflation to 2-3 per cent be? It could be achieved by plunging the economy into deep recession by hammering it with several large, successive cash rate increases. That would be an abrogation of the Reserve Bank’s legislated responsibilities.
To ensure inflation isn’t entrenched, returning inflation to the 2-3 per cent range should occur sooner rather than later, but this must be balanced against needlessly destroying billions of dollars of national income and hundreds of thousands of jobs.
In any event, the statement on monetary policy considers that inflation probably peaked at the end of 2022. The statement adds that longer-term inflation expectations and wages growth have so far remained consistent with the 2-3 per cent inflation target.
So why does the Reserve Bank Board consider that multiple further increases in interest rates will be necessary?
As I have argued on these pages, much of last year’s inflation was due to supply shocks arising from the pandemic and floods, and the Reserve Bank should not slam on the breaks to deal with them https://www.afr.com/policy/economy/why-the-rba-must-not-over-react-and-slam-on-the-brakes-20220703-p5aypx Last Friday’s statement on monetary policy confirmed that at least half of the increase in inflation has been due to supply shocks.
Already the nine successive increases in the cash rate are having a devastating effect on the underprivileged.
The Reserve Bank’s liaison confirms that community organisations are reporting strong growth in demand for their services – “particularly for financial stress relief, financial counselling, food bank and housing assistance.” Most of those crying out for help are renters, whose plight will only worsen as rents go through the roof.
The Reserve Bank might argue that it has to be cruel to be kind, that bringing families to their knees is good for them in the long run.
But this is just dogma.
Much of the pain from the fastest increase in the Reserve Bank’s cash rate this century has yet to be felt, as the remaining household savings buffers accumulated by the young and middle aged during the pandemic are exhausted and the roughly one in four home borrowers who took out mortgages at fixed rates of around 2 per cent come off them and onto variable rates of around 5 per cent https://www.afr.com/wealth/personal-finance/real-interest-rate-hammer-has-yet-to-fall-20230124-p5cf76.
And the unemployment rate of 4.5 per cent forecast by the Reserve Bank implies that lots of workers will lose their jobs.
A chart in the statement on monetary policy depicts the confidence levels in the Reserve Bank’s GDP growth forecasts based on its historical forecasting errors back to 1993. It reveals the Reserve Bank considers there is a real prospect of a recession in 2024 and 2025.
Yet it remains resolute in pressing ahead with multiple further interest rate increases.
If the Reserve Bank stays on its path of economic recklessness so that it can meet its chosen key performance indicator of a rapid return to 2-3 per cent inflation it will destroy the joint.
Then it will be left to the Federal government to pick up the pieces and support those disadvantaged Australians whose lives have been devastated by dogma adopted by Reserve Bank officials in a bygone era and never since questioned.
Craig Emerson is managing director of Emerson Economics. He is director of the APEC Study Centre at RMIT University, a visiting fellow at the ANU and adjunct professor at Victoria University’s College of Business. He is also chair of the McKell Institute.