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‘They stuffed it up’: RBA plays catch up

Analysis

The RBA is lagging its global peers with light touch monetary policy and lax guidance that will hinder, rather than help, markets and the economy.

“The RBA had a good first 18 months of Covid and then it came off the rails a bit towards the end of last year and into this year,” Stephen Miller, investment strategist at GSFM, told a briefing on Tuesday (January 25). “If you look at what Philip Lowe said, he claimed that things were different in Australia – that globalisation would limit prices… and that there was wage inertia in Australia. And I found those arguments unconvincing.”

A high participation rate – one of the reasons given for why wages wouldn’t increase sharply – just means that there’s a smaller pool of “discouraged workers” to fall back on, meaning the economy comes up against capacity constraints faster. And Miller believes that the wage numbers the RBA relies on don’t provide an accurate snapshot because they don’t include data on incentive payments or bonuses – ubiquitous in finance, but “also quite prevalent elsewhere”.

One of the RBA’s mistakes, to Miller’s mind, was essentially treating Australia as just as much an island in terms of the global economy as it is in terms of geography. But what’s happening globally in inflation is relevant Down Under too.

“I think the RBA missed this,” Miller said. “I think they also missed things in their communication. They had a confusing conflation of outcomes and calendar-based guidance. So (RBA Governor Philip Lowe) would say “We’re going to wait until inflation gets in the top half of the band and we’re going to wait until wages get to three per cent” – fine, but then he’d add that he thinks a rate rise in 2022 is extremely unlikely.”

“Why didn’t you just stick to the outcomes based if that’s your process? The communication got confusing.”

One area where Australia is different to the rest of the world is in its economy, which is highly leveraged to China, but the RBA “overplayed the differences and underplayed the similarities when it came to inflation” – creating a scenario that was “firmly rooted in the downside” in terms of the inflation risk continuum.

“That’s why I think they’re going to find themselves scrambling – a) to get their communications back on an even keel so they can satisfy the market that they’re on top of this, and b) to acknowledge that inflation is way above where they thought it would be,” Miller said. “As recently as November, the RBA were forecasting that it would take until December 2023 for inflation to get to 2.5 per cent… Today, a full two years beforehand, inflation is already above that point.”

At its next meeting in February, Miller said that the RBA should focus instead on outcomes, including by taking a firm stance on tapering its quantitative easing program, and “junk any calendar-based guidance.”

“It was unhelpful and it was confusing, and you’re seeing that at the moment because the market is pricing four 25 basis point policy rate increases this year. I think that might be a bit of a stretch – I don’t think it’s implausible. Whereas the RBA’s latest communication is that we’re having none,” Miller said.

“The RBA stuffed it up. It did a great job managing the Covid crisis until it became clear that economies were functioning better despite it. (The RBA) failed to adjust its rhetoric, and now it’s going to have to play a lot of catch up.”




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