While I will try and write about this in more detail another time, last week offered a case study in the RBA's confused communications approach, which has definitely added to market volatility. (Yes, that is something that should worry the Bank.)
On Tuesday we got a thoughtful speech from the Deputy Governor titled, "The RBA's thinking on the economy over the past year." Bond prices fell substantially on the back of this speech, since it was quite hawkish, even by Battellino's standards. ANZ summarised the speech with the headline, "RBA seeks to hose down market expectations [for cuts]".
Then on Friday we got the Governor's testimony to Parliament. I normally help out with briefing politicians beforehand, but did not get time on this occasion. The questions were, unsurprisingly, mostly abysmal. In a forum that was set up to review the RBA's performance and hold it to account on behalf of taxpayers, the politicians instead used it for the purposes of scoring points against their opponents, or getting the RBA to prattle on about the patchwork economy, or offshore conditions, which is a complete waste of taxpayer money/time since the RBA has recently published hundreds of pages of analysis on both these matters via speeches and the Statement on Monetary Policy. As a professional policy economist, Dr Andrew Leigh, in particular, could do much better.
During the three-plus hour session, there was not a single question on the RBA's apparently divided Board, or the recommendations of outgoing, decade-long Board member, Professor Warwick McKibbin (a former ANU colleague of Dr Leigh's), about re-designing the Board.
No questions on why the RBA had missed its inflation target over the last half year, or any real questions around why the RBA is forecasting above-target inflation for the next three years. And remember the RBA had worked for many years to formally redefine its policy goal around a singular inflation-targeting objective.
But in some ways the most disappointing result of day was the Governor's confusing testimony. It very much conflicted with the tenor of the Battellino speech on Tuesday, with most economists describing it as "dovish". For example, UBS concluded:
"RBA Governor Stevens' testimony was dovish, focusing on downside risks to growth, and acknowledging that international and domestic conditions have worsened since the August SoMP. Overall, his comments suggested the RBA had moved to 'neutral'."
Stevens' remarks prompted NAB to shift its first interest rate change from 2011 to mid 2012, with their Chief Economist commenting:
"Following today’s parliamentary testimony by RBA Governor, Glenn Stevens, National Australia Bank (NAB) has adjusted its expectations for the timing of future movements in the official interest rate."
After initially falling, bond prices rallied hard during the day. While technically correct, I felt Stevens was deliberately unclear (that's my diplomatic characterisation) in describing the RBA's policy mandate--the lay observer would have been left to believe the RBA had a multi-objective mandate, and was quite focussed on reducing unemployment. I don't think it is any coincidence that at the same time inflation is bubbling up as a problem, we get the RBA trying to fudge the lines around a once clearly-defined policy reaction function. And the reason the RBA gets away with this is because politicians are not holding them to account:
Dr LEIGH: But you also have other aspects to your mandates around growth and full employment [CJ: Wrong. The RBA's practical policy mandate is formally written down and signed by the Treasurer and Governor via the Statement on the Conduct of Monetary Policy, which defines the mandate as having a singular inflation-target with other objectives satisfied on a derivative basis by meeting the inflation target--as Stevens went on to subtly note in his testimony]. Wouldn't those suggest that you should be placing some weight on the impact on the average person rather than just the average dollar in the economy?
Mr Stevens : Yes, we have in our statutory objectives full employment, stability of the currency and the general prosperity and welfare of the Australian people [CJ: Stevens is being clever here in referring to the 1959 Act, and not the subsequent Statements that were signed from 1996 onwards, which were explicitly designed to address conflicts in the 1959 Act]. Over the past year or so the unemployment rate has been five, plus or minus a tenth basically. I think, by the standards of the nearly 32 years that I have been working as a professional economists, that is a low number. Indeed, when I started at the Reserve Bank, the notion that you could have five-ish per cent unemployment and two-ish or three-ish per cent inflation was a dream in those days. My answer to the full employment question would be: I think the bank has fulfilled that side of its mandate, recognising of course that a sustainable unemployment rate ultimately is a function of industrial relations matters, not monetary policy.
[CJ: So Stevens is saying, Yes full employment is part of our 1959 mandate, and because we are fully employed, we have met this goal. This, I think, is a misleading response. The much more important question is what happens when you do not have full employment, but you have an inflation problem? Stevens resolved the conflict in subsequent testimony, making it eventually clear--to the informed eye--that the RBA can only focus on inflation-targeting]
