Martin Place risks destroying economic prosperity with some of the most aggressive rate increases in the world that are based on forecasts not worth the paper they are written on.
One of our finest institutions, the venerable Reserve Bank of Australia, is in turmoil. Riddled by extreme group think and a hierarchical and tenure-based organisational structure that suffocates dissent, the RBA is once again blindly repeating mistakes that have plagued its policy decisionsin the developed world on the globe’s most interest rate sensitive economy despite not having clear evidence that Australia has a protracted core inflation problem.
Yes, we have lofty headline inflation care of an unusual series of supply-side shocks, which have conspired to push up the price of food, fuel, building materials and other items. And yes, consumer inflation expectations have unsurprisingly climbed in lockstep. But this should pass, like a pig through a python.
Ironically, this was precisely the logic the RBA employed to rationalise its first 25-basis-point increase in May, which was at variance with the 15- or 40-basis point increases expected by economists and the market. The RBA explained that it rejected 15 basis points because this would be “inconsistent with the historical practice of changing the cash rate in increments of at least 25 basis points”.
Through 2020 and much of 2021, governor Phil Lowe implored consumers, businesses and governments to leverage up to take advantage of ultra-cheap money safe in the knowledge that the RBA would protect them against the risk of higher rates. . “I would like to repeat a point I made a couple of weeks ago – that is, the latest data and forecasts do not warrant an increase in the cash rate in 2022,” was Lowe’s comfort to consumers on November 16.
Accordingly, the RBA’s cash rate before its board meeting was actually higher than it was on March 3, 2020, one day before the RBA decided to reduce its 0.75 per cent cash rate by only 25 basis points to 0.5 per cent.
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