Two things made Tuesday’s Reserve Bank board unusual, apart from the fact that it was in Perth: First, it was a week before a budget that will contradict their work, at least to some extent, and second, it was their first gathering since being humiliated by the RBA Review and sacked by the Treasurer.
Did these two elephants in the boardroom influence the decision to hike interest rates for the 11th time? Well, the minutes probably won’t tell us that in a fortnight, but those sitting around the table would have been thinking of little else.
The Treasurer is under enormous pressure to increase the dole, and more broadly has repeatedly declared that the budget will contain “cost-of living-relief” – that is, to lower it. The RBA’s task is to raise it.
Spending is spending – responsible or not
Of course, Jim Chalmers always adds the word “responsible” when he talks about relieving the cost of living, but that is just a press conference incantation – the budget will be giving money while the RBA is taking it away.
What’s more the stage-3 tax cuts are due to start in the middle of next year. The RBA is forecasting that inflation won’t fall to the top of its 2-3 per cent target band until mid 2025, so in mid 2024 it will still be fighting inflation – when $20 billion is pumped into the economy from tax cuts!
The last time monetary policy had to fight with fiscal policy was 2014 to 2016, when Tony Abbott, Joe Hockey and then Scott Morrison were cutting spending while the Glenn Stevens-led RBA was cutting interest rates to get economic growth and inflation up.
That didn’t end well.
We began the pandemic with interest rates too low to provide enough stimulus, so unconventional tools had to be used, including “calendar forward guidance” (that rates were not expected to rise until 2024) and fiscal policy had to go overboard to compensate.
This time it’s the other way around. There is now a Labor government more inclined to increase spending, and it needs to increase for reasons of fairness and compassion (JobSeeker) or simply the proper operation of society (aged care and health care).
Can any extra spending be “responsible” in the context of the RBA’s battle to slay inflation?
In Monty Python’s dead parrot sketch, the shopkeeper, Michael Palin, tries to distract John Cleese’s attention away from the fact that the parrot is dead, by declaring: “Remarkable bird, the Norwegian Blue, in’it, ay? Beautiful plumage!”
Mr Praline: “The plumage don’t enter into it.”
With fiscal policy, “responsible” don’t enter into it – it’s just plumage.
Spending is spending – it can be responsible but is always inflationary, and while it may not find its way into the board meeting minutes in two weeks’ time, part of the reasoning for Tuesday’s rate hike would have been to get in ahead of a spending budget, so they would not be responding to it in June.
Sacked and humiliated
As for the impact of the RBA review released two weeks ago, the directors and executives of the central bank have not only been humiliated, they have been sacked.
The review recommended, and the Treasurer accepted, that a new monetary policy committee be created to take over the main function of the board, and Dr Lowe must know he won’t be reappointed, even though he has asked to be.
In short, they are like a US president who lost on election day but is still president till inauguration day – a lame duck. Or Alan Joyce of Qantas and Gillon McLachlan of the AFL, CEOs for another five months but with their formally appointed successors down the corridor.
But there are no successors yet for the RBA’s leadership – they have been traduced and told they’re out, and then told to keep going until their replacements are found.
It’s a bit grotesque, really, although I can’t think of an alternative. The review exposed their inadequacies and the Treasurer published and approved it, but he couldn’t march them out on gardening leave immediately, so they have to carry on.
But they are human beings, and would be intent on proving their critics wrong and rebuilding their reputations.
Would it have made them more inclined to increase interest rates?
That’s unknowable, and of course they are motivated entirely by the welfare and prosperity of the people of Australia, but I don’t think the review would have made them softer.
Recession on the horizon?
As for the economic impact of the 11th rate hike in 13 months, we might conclude that it’s now more likely this downturn will end in recession, except … what’s a recession? The definition is both rubbery and meaningless.
With 400,000 new immigrants this year and a rapidly recovering China, it is very difficult for gross domestic product (GDP) to decline, even for one quarter let alone two. The definition of two consecutive quarters of negative GDP won’t be met.
But the RBA is intent on increasing unemployment by about 1 per cent and reducing household incomes, and therefore domestic demand, sufficiently to get the rate of price increases down from 7 per cent a year to 2.5 per cent within two years.
That’s a recession, in my view, whatever GDP is doing.
And the nature of our society is that the burden of this reduction in income will not be carried equally. That’s always true to some extent when inflation is being slain with the blunt hammer of interest rates, but now inequality is extreme.
That is what Jim Chalmers had in mind when he said the other day (and every day lately): “There will be cost‑of‑living relief in the budget and it will prioritise the most vulnerable people.”
So he’s saying that as monetary policy crushes demand and inflation, fiscal policy will protect the weak without generating more inflation.
Great idea – do that. And if he and Treasury secretary Steven Kennedy, who also sits on the RBA board, can pull that off, it would be a triumph.
Alan Kohler is founder of Eureka Report and finance presenter on ABC news. He writes twice a week for The New Daily
