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The RBA a fine institution but could do better

By Nicholas Gruen - posted Thursday, 21 June 2012


At nearly midnight on April 15th one hundred years ago, Frederick Fleet peered nervously into inky, icy darkness. As the cold white glow of the iceberg loomed out of the black, he sounded the alarm. But the Titanic turned slowly. . . . .

You’ve probably heard the economy likened to an ocean liner. Turning the rudder requires time to take full effect. But somehow wishing themselves into a world more suited to this circumstance, our central bank moves the rudder in slow motion. Perhaps they think it reassures the passengers. But I know of no economic model that would justify such action when the passengers’ safety is paramount rather than their comfort.

This macro-policy slow motion intensified the great recession of the early 1990s. Interest rates had been too high for too long. But we only know that now with hindsight. However we knew some things then – with foresight. As the official rate was cut from 18% to 17% in early 1990 I remember asking, with this official acknowledgement that high rates had done their job of slowing the economy, why weren’t we returning to normal settings quickly. Turned out it was a good question.

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Ever since, the Bank has been more responsive. And, though there’ve been the inevitable errors involved in having an imperfect perfect crystal ball, our Reserve Bank has shown excellent judgement in setting rates. Yet somehow it’s still got that ocean liner analogy backwards.

For instance the Bank’s October 2008 one per cent cut was seen as aggressive at the time. Yet by then Lehman Bros had collapsed and the global financial system was being held together with duct tape. We already knew that the cash rate should be much lower than the seven per cent it was. The iceberg was unmistakable. Each successive board meeting cut by a similar amount for another five months.

And as it sets our economic sails for a future it can only imperfectly know, Her Majesty’s Steamship RBA tames any anxiety it or we might feel about our inevitable ignorance by keeping things shipshape. The Board meets to set policy on the same day each month, come rain, shine, snow or sleet. Well except in January, which everyone knows is the silly season.

Now I don’t begrudge them a holiday, but sometimes the silly season gets serious. As it did in the summer of 2008-9 when the world wondered if that duct tape would hold as one financial market after another seized up. Some UK banks came within hours of closing down ATMs. What would have happened then? But this wasn’t enough to shake the RBA’s clockwork schedule.

Rather, they explained, this gave them more confidence in cutting rates by as much as one per cent in December, since they’d be on hols till February. They didn’t explain why they didn’t cut more, or why they couldn’t hold a January meeting or depute a sub-committee to make appropriate decisions if necessary. Seriously – would we tolerate this kind of thing from firemen or ambos, or even on the wharves?

Last week the Bank cut rates citing “modest domestic growth”. On the succeeding two days the Bureau of Statistics (ABS) released the national accounts and employment data respectively. Both suggested that domestic growth was anything but modest.

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To paraphrase Lady Bracknell, to make an important decision one day before a regular data release discredits your assumptions may be regarded as a misfortune. To make it two days before two data releases doubly discredit your assumptions looks like carelessness. The RBA’s Board members are busy people, but mightn’t they rearrange their meetings to minimise these problems?

Even if Board members require a rigid monthly timetable, the RBA’s current schedule seems almost wilfully perverse – exquisitely mistimed. Four of its eleven interest rate decisions each year are made three months after the previous quarterly national accounts release and the day before the next one. Just moving its meetings to the best possible regular time of each month – probably late in the second week – would ensure that all meetings were held within a week or so of quarterly national accounts and employment data releases.

But at a time when the words “whole of government” fall from official lips like dying leaves in a Canberra Autumn, would it really be asking too much for the Bank and the ABS to better coordinate their activities?

As Peter Costello sternly took to warning us before the 2007 election, our economy turns over more than a trillion dollars annually. It’s over $1.3 trillion today. So if a poorly informed Bank Board decision cost us 0.1% of one year’s economic growth, that’s over a billion dollars, some of it foregone forever. That’s too high a price for a work-to-rule mentality at the more genteel end of our labour market.

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This article was first published in the Age and the Sydney Morning Herald.



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About the Author

Dr Nicholas Gruen is CEO of Lateral Economics and Chairman of Peach Refund Mortgage Broker. He is working on a book entitled Reimagining Economic Reform.

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