The decision by the board of the Reserve Bank to hold the official cash rate at 4.35 per cent was widely anticipated. While the most recent National Accounts pointed to weak growth of the economy, particularly of the private sector, the underlying rate of inflation has still not made it into the bank’s target band.
To be sure, it looks as though any hike to the cash rate has now been ruled out, with a degree of optimism being expressed that inflation will return to an acceptable and sustainable rate next year.
Treasurer Jim Chalmers would have been hoping for a different outcome. A couple of rate cuts this year, flowing to lower mortgage repayments, would have been a useful backdrop for Labor’s re-election campaign.
The likely best he can hope for is one cut prior to the election being called.
Mind you, Chalmers won’t be placing any blame for this outcome at his own feet. But the stark reality is that excessive growth in government spending, both federal and by the states, has meant that inflation has stayed higher for longer; in turn, this has meant that interest rates have stayed higher for longer.
As for those economists who think the bank should be aiming for even lower unemployment because the inflation beast has been slayed, their misreading of the economy and labour market is profound. The reality is that even at the current rate of unemployment, the labour market is deeply dysfunctional.
Private sector investment opportunities are being continuously shunned because of the shortage of suitable workers.
There is clear evidence that government spending has been crowding out private sector activity. On the latest evidence, more than 80 per cent of employment growth has been in the non-market, government-funded sector. The associated slump in productivity is another important consideration.
The fact is the power of active monetary policy to affect the rate of unemployment without also adding to inflationary pressures is limited. The bank understands this; it’s just that some economists seem to have forgotten the inevitable trade-off between inflation and unemployment.
We are now heading into a new era of central banking in this country, with the formation of the interest rate-setting Monetary Policy Board due to be in operation by March.
If Labor “friends” are seen to dominate the new board, there will be real questions over the objectivity of the decision-making. This is particularly important because the non-bank appointees will make up most of the board.
The bond market participants may end up spending as much time analysing the background and political statements of the appointees as they do about the hard economic data that should determine interest rates decisions.
The two appointees Chalmers has already made to the current Reserve Bank board – both with strong Labor connections – bodes badly for the integrity of the appointment process to the MPB.
Depending on the quality of the appointments, there is every possibility that the independence of the Reserve Bank will effectively have come to an end.
As the most recent winners of the Nobel prize in Economics concluded, sound institutions are critical to economic prosperity. An independent central bank is one aspect of sound institutions.
For countries where governments effectively determine monetary policy, the evidence is clear that the outcomes on inflation and unemployment are inferior compared with countries with independent central banks. Chalmers should take note.
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