RBA and the importance of being earnest

By Nicholas Gruen

March 2, 2018

COMPLACENCY WATCH: On Tuesday next week the board of Australia’s central bank will be repeating an avoidable mistake. The board will meet to set the cash rate, with better information — the national accounts — being available for them to make their decision being released the next day.

Nicholas Gruen has been an observer of this type of complacency across government’s institutions, and wrote this still applicable commentary in 2012 for the Sydney Morning Herald and The Age:

At nearly midnight on April 15 100 years ago, Frederick Fleet* peered nervously into inky, icy darkness. As the cold white glow of the iceberg loomed out of the black, he sounded the alarm. But the Titanic turned slowly …

You’ve probably heard the economy likened to an ocean liner. Turning the rudder requires time to take full effect. But somehow wishing themselves into a world more suited to this circumstance, our central bank moves the rudder in slow motion. Perhaps they think it reassures the passengers. But I know of no economic model that would justify such action when the passengers’ safety, rather than their comfort, is paramount.

This macro-policy slow motion intensified the great recession of the early 1990s. Interest rates had been too high for too long. We only know that now with hindsight. However, we knew some things then – with foresight. As the official rate was cut from 18 per cent to 17 per cent in early 1990, I remember asking, with this official acknowledgement that high rates had done their job of slowing the economy, why weren’t we returning to normal settings quickly? Turned out it was a good question.

Ever since, the bank has been more responsive. And though there have been the inevitable errors involved in having an imperfect crystal ball, our Reserve Bank has shown excellent judgement in setting rates. Yet somehow it has still got that ocean liner analogy backwards.

For instance, the bank’s October, 2008, 1 percentage point cut was seen as aggressive at the time. Yet by then Lehman Bros  had collapsed and the global financial system was being held together with duct tape. We already knew that the cash rate should be much lower than the 7 per cent it was. The iceberg was unmistakable. Each successive board meeting cut by a similar amount for another five months.

And as it sets our economic sails for a future it can only imperfectly know, Her Majesty’s Steamship RBA tames any anxiety it or we might feel about our inevitable ignorance by keeping things shipshape. The board meets to set policy on the same day each month, come rain, shine, snow or sleet. Except in January, during the silly season.

Now I don’t begrudge them a holiday, but sometimes the silly season gets serious. As it did in the summer of 2008-09 when the world wondered if that duct tape would hold as one financial market after another seized up. Some UK banks came within hours of closing ATMs. What would have happened then? But this wasn’t enough to shake the RBA’s clockwork schedule.

Rather, they explained, this gave them more confidence in cutting rates by as much as 1 point in December, since they’d be on hols till February. They didn’t explain why they didn’t cut more, or why they couldn’t hold a January meeting or depute a subcommittee to make appropriate decisions if necessary. Seriously – would we tolerate this kind of thing from firemen or ambos, or even on the wharves?

Last week the bank cut rates citing “modest domestic growth”. On the succeeding two days the Bureau of Statistics released the national accounts and employment data respectively. Both suggested that domestic growth was anything but modest.

To paraphrase Lady Bracknell, to make an important decision a day before a regular data release discredits your assumptions, may be regarded as a misfortune. To make it two days before two data releases doubly discredit your assumptions, looks like carelessness. The RBA’s board members are busy people, but mightn’t they rearrange their meetings to minimise these problems?

Even if board members require a rigid monthly timetable, the RBA’s schedule seems almost wilfully perverse – exquisitely mistimed. Four of its 11 interest rate decisions each year are made three months after the previous quarterly national accounts release and the day before the next one. Just moving its meetings to the best possible time of each month – probably late in the second week – would ensure that all meetings were held within a week or so of quarterly national accounts and employment data releases.

But at a time when the words “whole of government” fall from official lips like dying leaves in a Canberra autumn, would it be asking too much for the bank and the ABS to co-ordinate their activities?

As Peter Costello sternly took to warning us before the 2007 election, our economy turns over more than $1 trillion annually. It’s more than $1.3 trillion today. So if a poorly informed bank board decision cost us 0.1 per cent of one year’s economic growth, that’s more than $1 billion, some of it gone forever. That’s too high a price for a work-to-rule mentality at the more genteel end of our labour market.

*Frederick Fleet was a crewman who survived the Titanic sinking.

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