If the RBA has lost its way on interest rates, we'll suffer from its fumbling

The Age

a day ago

Taken in isolation, the decision last week by the Reserve Bank's new interest-rate setting committee to defy all expectations and delay a cut in the official interest rate of a mere quarter of a percentage point, by a mere five weeks, is neither here nor there. Even so, the fuss it has caused damages the Reserve's credibility – 'do these guys know what they're doing?' – and thereby its ability to manage the economy successfully.
And the coincidental timing with the first application of the new rule that the Reserve publish the numbers of committee members voting for and against – a supposed reform intended to encourage greater debate before such decisions are made – won't help the Reserve convey confidence that it's charting a steady course to peace and prosperity.
It was obliged to reveal that while six board members wanted to delay a rate cut, the other three wanted to get on with it. I don't have any doubt that the six included governor Michele Bullock and her deputy, Andrew Hauser.
And, though I have no inside information, it wouldn't surprise me if the new Treasury secretary, Jenny Wilkinson, was among the dissenters. Why? Because her predecessor, Dr Steven Kennedy, quietly made it clear in a succession of speeches that Treasury saw no reason for the Reserve's great fear that wage growth could explode at any moment. (In passing, note that the recent changes to the Reserve's Act make it clear that, while the Treasury secretary's seat on the board is 'ex officio', he or she acts in their individual capacity, and cannot be directed by the Treasurer.)
The Reserve's insistence on delaying the next rate cut – based, apparently, on the flimsy argument that the inflation figures for the month of May may have somewhat overstated its rate of fall – came at a most inauspicious time.
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While Trump's erratic pronouncements are adding greatly to uncertainty – prompting consumers and businesses to delay making big new spending commitments – the last thing the authorities should be doing is adding to it. By this silly decision, the Reserve has shaken the faith of the financial markets, businesses and households in its predictability and desire to steer a steady course to low inflation and higher growth.
Not that this means I have much sympathy for the red-faced participants in the financial markets and the media. They're just playing their own games for their own commercial reasons. The reason the financial markets are so obsessed by predicting whether the Reserve will or won't jump at its next rate-setting meeting is that they place bets on the outcome.
So a different headline for stories about the unpredictable decision is: 100-to-1 outsider wins the Reserve Bank Stakes at Martin Place on Tuesday.