The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Wednesday, June 1, 2011

Will the RBA be too smart by half? Maybe

A nice little note from the Shadow Governor, Terry McCrann, today. I, of course, very much enjoyed his mutterings on core vs. headline inflation. It is good to see the RBA appears to agree with me (and the ECB) on this front. I have to say, I have mixed feelings about monetary policy right now. I want the RBA to win. I want them to be the best. I would like them to avoid the deep dysfunction that plagues so many other public institutions. As you know, I have immense respect for Stevens and his team, notwithstanding that I have been their most prominent critique on occasion. For mine, this 'waiting' for more information is a joke. They are an inflation-targeter. They got all the information they needed in Q1. Okay, we know that had all the data flows been solid over the last month, they almost certainly would have hiked in June. That's the point: the data flows were not solid. Indeed, they were decidedly soggy. So, by waiting, and not hiking in May, as I think they should have, they have set-up apparent decision-rules based on past data. McCrann says as much today: they cannot hike next week because of Q1 GDP. This is absurd: the Q1 inflation gave them all the information they needed. You cannot ignore the inflation data because of other tangential information. This is as bad as what they accuse other central banks of doing when they only focus on core inflation. If you are still not with me, here's the problem. What happens if the data preceding July is also sketchy? And then in late July the Q2 CPI once again prints high? Maybe it won't, but that's a high quality problem the RBA should ignore. I have written about this scenario so many times I am not going to rehash it here again. In short, I think it would be a disaster for the RBA--to have had high core inflation running for more than six months, and not responded during that period. I can assure you, every man and their dog would eventually look back and say that they got behind the curve again. And then we are certainly staring down the barrel of 2-3 rate hikes before the end of the year. I have a message for the RBA: don't get too smart by half with the PR and 'bring the community along with us' game; don't listen, in any way whatsoever, to conflicted statements from your Board; and don't risk your reputation and credibility. Just do your freekin job. If you don't, a lot of people will be coming after you, including your biggest fan. ;-)