We have seen written, in our inept Australian media, several articles that claim that the RBA underperforms its major central banks because it relies on hard economic data. This is such a ludicrous, but convenient opinion that we felt compelled to respond.
Firstly, the RBA must always be reliant on hard economic data. Economic theory is based on hard economic data, not soft surveys invented by market research companies and banks.
Secondly, the most absurd criticism of the RBA, we have read, is that the RBA is data dependant. On what other basis would the RBA make economic forecasts? Pixies at the bottom of the garden?
Thirdly, and this is not a criticism to be taken lightly, the RBA – like our judicial system – cannot be considered independent unless it makes judgments based on facts. They are not infallible – mistakes will be made – but they must at all times apply logic and reason to their interpretation of the facts.
Fourthly, the RBA did not raise rates by nearly as much as central banks in Europe and the US. Unlike the ECB and Federal Reserve the RBA did not achieve even a brief period of negative broad money growth. Rather than underperforming other central banks the RBA outperformed because its initial opinion that the impact of the pandemic lockdowns would prove to be ‘transitory’, has broadly been correct so far.
Our view is that that the RBA will remain on hold this year because:
- At 4.3% unemployment the RBA has achieved its mandate of full employment;
- The financial system is stable;
- Inflation is still at risk of reigniting because wages growth is above 3.5% while labour productivity is in aggregate negative.
- On the monetary side inflation has been temporarily depressed by the electricity subsidies that have now expired and broad money growth is still occurring at over 4%pa.
These points are part of a broader piece of game theory, based analysis that our team have used to predict changes in RBA monetary policy
