Lowe Interest Rates

Since 2008 I have been talking to people, giving speeches, and writing articles about how and why low inflation is here to stay - the world over. This this is also true for Australia. Having correctly forecast that the 208/10 resources boom would not generate inflation in Australia, I watched with dismay as the Reserve Bank of Australia in 2009 raised rates, the only central bank to do so in the middle of the Global Financial Crisis, because it feared inflation?

Now today the RBA fears low inflation?

They were wrong then, and they are wrong now, for precisely the same reason.

Which is odd because you think they would have had plenty of time to learn from their past mistakes, but this is an institution that internalises its past errors rather than learn from them. We saw this when the RBA came out and suggested the “new normal”, that is the neutral setting for interest rates which is not stimulating or slowing the economy, is an average of the past ten years of the official rate.

This is a completely ludicrous proposition, that past correct decisions and major errors, are all incorporated into what the RBA thinks rates should be today if set at neutral. It also clearly assumes that the economics of the world have not evolved in the past ten years?

Of course the economics of the world, the way in which economies operate, how people go about their lives and businesses seek to expand, have all changed dramatically.

New policies are absolutely essential.

This would seem to be a self-evident statement to all of us.

For the RBA however, and the Treasurer under advice from the RBA, it seems nothing has changed and nothing seems to change. Especially in regard to how the RBA runs things and what it strives for. At a press conference this week the treasurer outlined the new policy for the RBA. It was a reprint of the same policy of twenty years ago, that the inflation target should be 2-3%?

How could anyone possibly imagine that inflation should today and over the next decade be the same as what it was in the 1990s before the internet, modern communications, e-commerce, globalisation, and various free trade agreements. How could anyone, seriously, possibly think the approach to inflate by the central bank should be the same as it has always been?

This goes to the heart of the problem at the RBA. There are no principles of economic evolution, or internal cultural change.

The RBA is an institution set in stone, where whoever is as most the same as their predecessor gets promoted to lead the banks nowhere as best as possible.

The only solution would be to do what the rest of the modern world does, that is, to appoint the Governor of the Reserve Bank from outside the bank. This is normal best practice elsewhere in the world. The Bank of England probably took things a step too far in appointing their Governor not just from outside the bank, from outside the country, from Canada.

Australia is not of the modern world it would seem in regard to our central bank. The performance of the RBA in raising rates three times after the GFC had started, and in raising rates in the middle of the GFC un-necessarily, which put our nation in hardship, is self-evident of the very poor performance our RBA delivers the economy.

Yet our treasurer has just bowed to everything the RBA wanted in terms of its sown mandate? The idea that the inflation target should remain the same is a massive error which even high school students could figure out. Then to insult the nation with more injury, the treasurer added greater flexibility about achieving that target.

There is virtually no answerability of the RBA to the Australian people. The idea of independence of the RBA has been stretched to a bizarre level. Beyond what is normal arctic elsewhere in the western world. Dangerous to the economy level, we have seen this play out already - several times.

Some of this is due to the financial industry lack of critique of the RBA. Having worked around the world I can say categorically that other countries openly critique the performance of their central bank in a way that simply does not occur in Australia. This is a very un-healthy state of affairs. Australia has already been considerably diminished due to the poor policy decisions of the RBA, and will continue to be.

Philip Lowe himself has yesterday stated that his primary role is to “boost” inflation?

This is because he simply reads the paper about what the ECB is worried about, and so simply repeats similar language without understanding the primary force driving our modern economy.

That force is “competition”. What does real competition, which exists today, but did not exist 20 years ago do? It drives down prices!

The more interlinked and global we all become, the lower prices will naturally remain.

The “problem” that people like our Reserve Bank Governor see low inflation to be, is nothing other than a fantastic achievement of the modern economy.

The RBA Governor therefore has declared his primary task, as destroying this wonderful modern day economic achievement.

There is no doubt then, that the RBA will follow a path of over-stimulation well into the future. This will be great for property prices, but it creates issues with the degree of stability in economic growth we can expect further down the track. This misguided approach to monetary policy, is likely to contribute to an over-heating economy a little further down the track. This will end of course, in a steeper dislocation and slow-down than would otherwise have occurred.

From the current statements of the young RBA Governor promoted from within, we can expect the official rate to remain at 1.5% for perhaps two years. Perhaps even be nudged lower to 1.00% over the next year, as the young Governor pursues his wish of destroying our current very healthy and natural low inflationary environment.

As I said, it will be good for low interest rate stability, and very bullish for property prices.

Clifford Bennett