Wow, this was a smoking column that I missed from the AFR's David Bassanese. It's certainly one of the best he's written. If you want to understand the political-economics swirling around the RBA right now (despite near full employment and average lending rates), read this.
Blind freddy can see this has been a coordinated campaign by the Gillard Government in concert with unionistas like Paul Howes and Garry Weaven to apply public pressure on the RBA to relax monetary policy to help the Government score political points for its May 8 budget. The crazy thing is that they didn't need to do it given the RBA was all set to cut rates in May so long as it got a benign CPI. The risk, in fact, is that these shameful efforts to undermine the credibility of Australia's central bank (see Bass below) could be counter-productive. It is not inconceivable that the bank decides to dig in...
Here it's opportune to remind the ALP economist and reflexive Gillard apologist, Stephen Koukoulas, of Laura Tingle's exact words last week following a private briefing from the Prime Minister's office on Gillard's speech:
"Prime Minister Julia Gillard will today aggressively link her budget surplus goal directly to lower interest rates, saying that the Reserve Bank of Australia has “plenty of room” to cut its 4.25 per cent cash rate...
In effect putting the political success of next month’s budget into the hands of the Reserve Bank board, Ms Gillard will say that the large interest rate differential between Australia and offshore markets gives the RBA “plenty of room to move further if need be”."
Tingle is no fool, and normally sympathetic to the Labor cause. But her independent assessment of Gillard's intent of "putting the political success of next month’s budget into the hands of the Reserve Bank board" is clear to all but the intellectually incapacitated.
Anyway, back to the analysis of the Harvard-educated, David Bassanese, which is a must-read:
Hands off the RBA’s mandate
PUBLISHED: 20 APR 2012 14:30:44
DAVID BASSANESE
If investors need a reminder of how inflation was allowed to ratchet up in the 1970s – wiping out billions in sharemarket and property wealth and eventually requiring a wrenching recession to bring it under control – they need look no further than at some of the silly utterances from certain trade union officials, fund managers and even academics in the past week.
The Reserve Bank of Australia’s failure to cut interest rates last month – a decision I disagree with – has led to suggestions the bank is too focused on inflation and should pay more attention to unemployment and the exchange rate.
In the vanguard of this criticism was the grandstanding head of the Australian Workers Union, Paul Howes, who ventured: “I’ve been wondering now for the last couple of months, do we have the charter right for the RBA?”
He went on: “The RBA’s obviously got a charter to deal with inflation. We know the importance of that. But they have the most ability to impact on the Australian dollar. We believe very strongly that they need to cut rates to put downward pressure on the Australian dollar.”
As if that were not enough, Industry Funds Management chairman Garry Weaven – an ex-union official – also reckons the RBA’s inflation focus is excessive.
He argued: “Consistently now for many years the Reserve has had far too much focus on inflation only and not enough on employment and economic prosperity generally, which is their requirement under the act.”
Considering the economy is close to full employment, with an unemployment rate of only 5.2 per cent, it’s an amazing observation by someone I thought knew better.
Let’s not forget Australia’s history of mining booms has not been great. They’ve usually generated an inflation blowout, pushing the economy into recession just as the mining boom goes bust. Yet in the past decade we’ve endured the biggest mining boom in our history at a time when the economy was already stretched due to the debt-financed property and consumer boom. So far we’ve managed to keep inflation pretty much under control, allowing our economic expansion to continue – albeit at a more moderate and sustainable pace.
Despite much bleating, the high exchange rate has helped us manage and spread the benefits of the mining boom in a way rarely seen in the past. By lowering international competitiveness, it has dampened demand and inflation pressures in non-mining trade exposed sectors. And by lowering import prices, it has boosted real household incomes that do not directly benefit from sky-high export commodity prices.
What really floored me in the week was Bob Gregory, a distinguished economics professor, also suggesting the RBA’s agreement with the government should be tweaked.
Speaking on the ABC’s 7.30 Report Gregory said: “I think the next letter that is written [between the government and the RBA] should be a bit more neutral. I mean I don’t think it should say, ‘forget about inflation, focus on unemployment,’ it just should be a bit more neutral.”
And he added: “I don’t think anybody that you and I think highly of thinks that any bank should fight inflation first.”
Come again? The move to explicit central bank inflation targets has probably been the single best economic reform across most of the developed world in the past 20 years. It has helped lower inflation expectations and interest rates, and improved the ability of businesses to plan for the future.
So much so that even the United States Federal Reserve has only recently belatedly adopted an explicit inflation target.
What’s more, economic theory tells us that there’s no long-run trade-off between inflation and unemployment – the latter is set by structural factors such as job skills and work incentives. The best contribution that monetary policy can make to long-term economic growth is ensuring inflation is not allowed to get out of hand.
I believe central banks should fight inflation first. Having a long-term target provides a framework to formulate and explain interest rate decisions. Effectively, the RBA sets interest rates today at a level it considers most likely to achieve inflation of between 2 and 3 per cent over the next two to three years.
That’s clearly a judgement call, and the RBA’s agreement with the government gives it considerable discretion in how it pursues this target.
Current trends in economic growth, unemployment and the exchange rate figure prominently in the RBA’s deliberations.
All up, while it’s reasonable to disagree with the RBA’s month-to-month judgements, it’s another matter altogether to suggest its framework is wrong and should be changed. That’s a slippery slope.
If it isn’t broke, don’t fix it.
- Posted using a mobile device
