David Bassanese has really stepped-up the quality of his RBA commentary of late. And this should be easy for him to do. DB was one of the top fixed-income strategists at the old BT, and completed an MPA at Harvard's Kennedy School of Government (much like Andrew Leigh, MP, I believe). Whilst at Harvard, he also shared a house with one of the RBA's two outstanding Governor candidates, Dr Guy Debelle. Debelle was doing a PhD at MIT, and DB enrolled in the MIT macro course too. In today's column, he makes several interesting points. First, had wages growth hit 1.2%, the RBA was near-certain to go in June:
"Had wage growth jumped in the March quarter – with private sector wages rising by about 1.2 per cent or more – the RBA would have been compelled to raise rates next month irrespective of lingering weakness in the nonmining side of the economy...In this case, the RBA could not afford to show any mercy."
We might get a 1-2 month repreive:
"For those sectors doing it tough, however, the wage data this week might at most provide a stay of execution. It adds to the case for the RBA potentially holding off an interest rate increase for a month or two, but does not remove the medium-term case for a further tightening in financial conditions."
But the Bank is trying to be more pre-emptive. You cannot set rates for the next two years based on data that derives from the past. On this basis, they should have gone in May, in my opinion:
"What’s more, the RBA needs to be forward looking, as its own forecasts point to labour market tightening in the year ahead. The RBA also needs to be wary of persistently high inflation ratcheting up inflation expectations – which would also push up wage growth even if the labour market did not tighten. Indeed, the bank is already staring at its forecast of annual underlying inflation averaging 3 per cent through next year."
Finally, DB trots out my frequently-made observation that the RBA's inflation-targeting track-record is actually very patchy. It is rare that commentators close to the RBA are prepared to make this claim:
"And it is probably also irking the bank that despite its aim to target the mid-point its 2 per cent to 3 per cent inflation target, both headline and underlying inflation have averaged 3 per cent in the past 10 years. In the past five years, moreover, the trimmed-mean and weighted-median measures of underlying inflation have averaged 3.2 per cent and 3.4 per cent respectively. The longer underlying inflation averages about 3 per cent, the more likely this will be factored into wage bargaining outcomes – especially as the labour market gets tighter. In turn, this risks entrenching a higher level of underlying inflation, and making achievement of 2-3 per cent inflation over the medium term increasingly difficult."
