A very good op-ed from HSBC's Paul Bloxham in Business Spectator today. After a decade at the RBA, Bloxham confirms on the record what I've argued here many times before (and ironically reiterated in my own Biz Spec op-ed today)--the RBA has, in practice, one main policy goal: price stability. Talk of a 'dual mandate' is more a long-term theoretical assumption (and convenient short-term PR spin) that supposes no trade-off between inflation and unemployment. There is a possibility that the dual mandate comes back into play in practice if the RBA starts getting concerned about its community constituency and political independence in concert with the pragmatic challenges associated with managing an MPC dominated by doves. That is to say, the RBA might tolerate a bout of higher inflation for longer than a pure inflation-targeter would on the basis that it was not having an impact on inflation expectations (obviously an assumption in and of itself). In fact, Glenn Stevens said as much in recent parliamentary testimony, although it was hard to make head-or-tail of what he really meant by these remarks. They struck me as the application of contorted logic to rationalise legislation enacted in 1959 that has scant relevance to 2012. Bloxham also discusses the RBA's shift to so-called 'nowcasting', which I've been keen to belabour too. In short, I think that the RBA has abandoned its 2010-11 experiment with pre-emptively (restrictive) policy. It's easy to pre-emptively normalise rates. Much harder to justify to the community why you need to tighten policy on the basis of error-prone forecasts when there is no contemporaneous data to buttress your case...Over to Blocko:
The Reserve Bank's devotion to its inflation target was on full display this week. Indeed, Tuesday's decision to hold rates steady offers clear insights into the way the bank operates. Despite economic growth being 'somewhat below trend' and labour market conditions having 'softened during 2011' by the Reserve Bank's own admission, they are nonetheless waiting for the next inflation print before they possibly cut rates. Rather than trust its forecasts, it seems the Reserve Bank is very focused on actually seeing the trends in the CPI data. This is an important point for understanding its behaviour.
With only one policy instrument, the bank is well aware that it can only really have one target. While the Reserve Bank Act specifies three goals, including price stability, minimising unemployment and improving 'general welfare', the RBA's signed agreement with the government mechanises this in the form an inflation target. The RBA has decided, over a run of years, that the best way to meet all three goals in the Act is to set monetary policy consistent with maintaining stable inflation. Specifically, the bank seeks to maintain inflation 'between 2-3 per cent, on average, over the cycle'. Of course this requires that it is forward-looking in its approach.
