At Tuesday’s meeting, the Reserve Bank board should ignore incessant demands for cash rate increases that would plunge the economy into recession. One Recessionista has gone so far as to accuse Reserve Bank Governor, Michele Bullock, of being beholden to the Albanese government as evidenced by her refusal to lift the cash rate further.
Australia has been in a per capita recession since early 2023, its strong post-pandemic immigration keeping it out of a popularly defined recession of two successive negative quarters of economic growth.
At the same time, the annual inflation rate has more than halved from a peak of 7.8 per cent at end-2022 to 3.8 per cent in the June quarter of 2024.
Of greater interest to the Reserve Bank is the trimmed mean inflation rate, which has fallen to 3.9 per cent in the June quarter from 6.8 per cent in the December quarter of 2022, the sixth successive quarterly fall.
The Recessionista who suggested that the Reserve Bank might be keen to avoid upsetting politicians, added late last month that if the Reserve Bank were doing its job, it would immediately lift the cash rate by 50 basis points.
Another Recessionista was demanding in late-July that the Reserve Bank increase the cash rate by 40 basis points at its Tuesday meeting, followed by another 25 basis points in September.
The call for a cash rate increase has persisted into this week.
Plenty of other economists have demanded that the Reserve Bank jack up the cash rate again, forthwith.
Much of the frenzy seems have arisen from the release of two concerning monthly inflation figures, which were tempered by a more comfortable quarterly number released on the last day of July. The Australian Bureau of Statistics might give consideration to the utility of releasing monthly inflation data that are but partial measures of inflation, and therefore inaccurate. If nothing else, these monthly numbers sure get the Recessionistas excited.
But the Reserve Bank seems to be making wise decisions. Deputy Governor Andrew Hauser, a Briton, has pointed out that the first priority of the Bank of England is to bring inflation back to target, whereas in Australia the Reserve Bank has a “more balanced” mandate of controlling inflation while avoiding job losses.
In fact, the Reserve Bank is bound by law – the Reserve Bank Act of 1959 – to contribute to the achievement of full employment.
Australia’s economy grew at a meagre annual rate of 1.1 per cent in the March quarter, more recent retail sales have been weak and almost all the recent job creation has been funded by governments.
The Reserve Bank has confirmed there is no price-wage spiral and that inflation expectations are well anchored.
Despite an avalanche of criticism, the Reserve Bank is taking its dual mandate seriously and making decisions based on the available data, not on models based on history or on the demands of Recessionistas.
It is likely that the Reserve Bank will hold the cash rate on Tuesday. But to the dismay of the Recessionistas the next move in the cash rate is likely to be down, later in 2024 or in the early months of 2025.
A valuable insight into the Reserve Bank Board’s thinking will be provided in its Statement on Monetary Policy released on Tuesday. It will contain the Bank’s forecasts of the trimmed mean inflation rate. If those forecasts are essentially unchanged, they will signal that the Reserve Bank considers it is on track to bringing inflation back into the 2-3 per cent band within a reasonable time.
Yes, inflation is costly to the economy and to consumers. But unnecessarily high unemployment concentrates the economic pain on the vulnerable whose employment prospects depend on a recession-free economy. That the Reserve Bank cares about the unemployed is not only required by law it is also uplifting.
Craig Emerson is managing director of Emerson Economics and director of the APEC Study Centre at RMIT University. He is an adjunct professor at Victoria University’s Centre of Policy Studies.