Reserve Bank should be praised for the economic successes few want to talk about

Even with inflation growing at its fastest pace in 30 years and rates rising at a fearful speed, the anger directed at the RBA is a bit over the top.

The Reserve Bank of Australia’s headquarters in Sydney currently resembles the Lannister’s Red Keep in the final season of “Game of Thrones,” complete with a fire-breathing dragon melting its windows and an angry mob scaling its outer walls.

Even with inflation currently running at its fastest pace in 30 years and interest rates rising at a fearful speed, the anger now being directed at the RBA is all a bit over the top.

Official interest rates were never going to stay at close to zero, and for those who failed to compute that fact prior to rushing to buy into an already inflated housing market in recent years, it seems more than a little unfair to blame the RBA for the anguish now occurring — and the property winter that is coming.

With Australian Treasurer Jim Chalmers kicking off a review of the RBA this week, the first in 30 years, it seems a balanced account of the central bank’s recent activities needs to be read out in the public square.

So here goes.

It can be argued that the RBA was slow to see and react to the surge in inflation that is now washing over the economy, but it wasn’t the only global central bank to drag its heels, thinking it might be a passing storm.

It can also be argued that the RBA’s economic forecasts were well off the mark last year, but the central bank is now rapidly moving to contain the inflation problem fuelled by both domestic and overseas factors, and it has immense firepower at its disposal to achieve the task.

The investment community might also shake a fist at the collapse of the RBA’s yield-curve-control program late in 2021, which unsettled domestic and overseas participants in the government bond market for a time.

The RBA did indicate that it might be 2024 before interest rates rise, something that was clearly in error.

So there you go, load your artillery piece and yell fire if you want.

But there is another side to the story that needs to be told. It might even placate and disperse the mob.

Australia’s unemployment rate is at its lowest level since Gerald Ford occupied the White House, and there is good reason to expect it will continue to decline.

The mob needs to understand that prior to the Covid-19 pandemic — one of the biggest health and economic shocks in a century — the jobless rate was above 5.0 per cent. It has now fallen to 3.5 per cent.

What usually follows after major economic shocks is years of what is called labour-market scarring. It basically means years of high unemployment, with some workers frozen out of a job potentially for the remainder of their working lives.

Some economists now think the unemployment rate, perhaps the best indicator of economic strength, could keep falling and soon drop below 3.0 per cent, achieving levels that most Australians will find hard to fathom.

Shane Oliver, chief economist at AMP Capital, puts the probability of an unemployment rate beginning with a “two handle” as high as 40 per cent, while Catherine Birch, senior economist at the Australia & New Zealand Banking Group, said a drop below 3.0 per cent in early 2023 “isn’t too difficult to envisage.”

Ivan Colhoun, chief economist of corporate and institutional banking at the National Australia Bank, said that if labour demand holds up, then unemployment could well fall below 3.0 per cent.

The glowing state of the job market, which can be attributed to the cutting of interest rates by the RBA at the start of the pandemic, the design of Canberra’s fiscal support and the closure of borders to foreign workers, needs to be recognised.

School leavers and university graduates are finding work, and people who have been on the sidelines of the job market most of their lives are now finding work for the first time in years.

It is the best protection from recession the economy can hope to have.

These aren’t minor points and they need to be taken into account when assessing the success or failure rate of the RBA in recent years, while also proposing changes to the operations of what is one of the best public-policy institutions in the country.

Write to James Glynn at [e-mail]