The Reserve Bank of Australia is set to announce its latest interest rate decision in the hours ahead – one expert shares his predictions, but it’s something Australians don’t want to hear.
Comment
Most Australians have been living in recession for two and a half years.
This is the worst drop in living standards since the Great Depression.
This is largely the Albanian government’s fault, as the rent and energy price shocks could have been avoided.
But the Reserve Bank of Australia also deserves blame, as its policy has become increasingly incoherent as inflation has retreated but it has refused to cut interest rates.
Who is to blame?
The Albanese government made two fatal inflationary mistakes at the start of its term.
The United States has dropped an immigration bomb on the labor market, undermining wage growth and triggering a rental price shock.
It also ignores the consequences of the East Coast gas export cartel profiteering from the war in Ukraine, which has resulted in massive increases in electricity prices.
the Reserve Bank of Australia is not expected to cut interest rates until 2025. Image source: iStock
Opinion: Why the RBA must cut rates now
However, the poor management of these shocks has recently been transferred to the RBA.
As was the case in the previous cycle, the RBA mistakenly assumed that wages would continue to grow despite a sharp drop in immigration levels.
For whatever reason — ideological or politicized — central banks fail to understand that a sustained supply-side shock of cheap foreign labor will always reduce wage growth.
As a result, the top indicator of wage growth is now falling much faster than expected. In a service-based economy like Australia’s, this means that broad-based inflation will ensue.
Oddly, in recent speeches the RBA would rather bury its head in the sand than mention its wage mistakes.
It’s a troubling development for the RBA, which in the past has tracked data at least when it turned out to be wrong.
All eyes are on Michelle Bullock, Governor of the Reserve Bank of Australia. Photo credit: NewsWire/Monique Harmer
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Secondly, on energy, the RBA has been making the ridiculous argument that fiscal energy rebates do not count as reducing inflation because they will be phased out in 2025.
This political miscalculation will soon be proven wrong when the government announces that it will extend the tax rebate until 2026.
This would completely change the RBA’s forecast for the trajectory of inflation out to 2025, and we have to ask – why would the central bank make such a foolish decision not to let this happen, especially in an election year?
The answer is that the RBA has proven as inept as the Albanese government in handling today’s shocks.
Another mistake on the road
Even more bizarrely, after the RBA was damaged by being overly hawkish in the pre-COVID cycle, the central bank changed its analytical framework to place greater emphasis on structural economic measures, even though it can only control for cyclical outcomes.
homeowners have been feeling the pinch for months, with no relief in sight. Photo: iStock
In particular, banks have become very focused on productivity performance due to concerns about (you guessed it) rising wages.
But productivity is a political issue, not a monetary policy issue. Specifically, the government’s willingness to undertake economic reforms.
In theory, falling productivity would lead to higher inflation, but in practice Australia’s economy is driven by mass immigration, which provides it with cheap foreign labour – so worrying about wages is a waste of time, regardless of productivity.
Furthermore, by keeping interest rates too high for too long to eliminate non-existent wage pressures, the RBA has destroyed the private sector economy on which all productivity growth depends.
The central bank’s move is actually crying “wolf”, but it is actually strangling the wolf.
The central bank’s move is actually crying “wolf”, but it is actually strangling the wolf.
It’s time to back off and apologize
Michele Bullock took over as governor of the Reserve Bank of Australia after her predecessor Phil Lowe took a long-standing hawkish stance that led to too low inflation and left hundreds of thousands of people unemployed for no reason.
Now Ms Bullock has made a new series of mistakes, and if the central bank doesn’t back down after a recent string of appalling economic data, including the worst economic growth in 30 years, the same results will repeat themselves in 2025.
Economists do not expect the Reserve Bank of Australia to cut interest rates this afternoon, and markets are divided on what action the central bank will take when it next meets in February.
The cash rate was supposed to have fallen, but the RBA screwed it up again.
David Llewellyn-Smith is Chief Strategist at MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was previously the founding publisher and global economics editor of The Diplomat, Asia Pacific’s leading geopolitical and economics portal. He co-authored The Great Crash of 2008 with Ross Garnaut and was editor of the second edition of Garnaut’s Climate Change Review.