The RBA has managed to make a questionable interest rate decision worse by undermining its own credibility, as the dollar drops. Michael Pascoe writes.

The Law of Unintended Consequences is always at work. It’s a fair bet those who crafted the RBA review and the cheer squad who campaigned for it didn’t intend to diminish the institution,

an institution whose credibility matters as much as what it actually does.

But diminished the RBA is, and thus the message it tried to deliver with Tuesday’s rate rise is weakened, the pain of tighter monetary policy delivering less gain.

Instead of a strong message about the bank being committed to lower inflation, the mechanism invented by the review has resulted in a rise, the strength of which was quickly assessed by the market as being half-arsed.

Our central bank lifting rates while the rest of the world is either sitting pat or thinking of cutting would normally be greeted by our dollar rising. Instead, it fell.

Blame that on the review embraced without pause by Jim Chalmers, the review that invented a separate board to decide monetary policy, a board stacked with part-timers who can overrule the RBA professionals or, as happened on St Patrick’s Day, undermine the decision with a vote that showed the board wasn’t at all sure it was doing the right thing.

The review embraced holus bolus by Jim Chalmers and his Treasury included the idea of publishing the board’s vote on rate movements or non-movements.

Thus, the headlines of the 5 – 4 vote showing the rise was a close-run thing, that the (theoretically) best monetary minds the nation can muster were very much split about the wisdom of increasing rates now when the economy is being hit by an energy shock, thanks to the Washington asylum’s inmates running amok.

The review didn’t go as far as suggesting each board member publicly own his or her opinion; the votes are left anonymous, but it is possible to make an educated guess about some of them.

Given the hawkish statements from the governor and, more so, the deputy governor ahead of the meeting, it looks a pretty safe bet that the two RBA members voted to increase rates.

That means the “outsiders” voted 4 to 3 to not increase rates. The members, independent of the central bank institution, were more cautious and would not have done it.

What does that say about the power of the professionals’ arguments and the access the part-timers have to the RBA staff to form their own opinions?

A strong anti-inflationary statement thus became a weak one.

Pain for not much gain in the inflationary expectations department.

Some further points to make about inflation:

1. Where is the evidence that inflationary expectations have become unanchored, that the markets think the RBA has lost its grip? Sure, the national newspapers keep bleating, but that’s what they do. The most recent RBA statistical publication showed market economists’ forecast of median inflation two years ahead to be a comfortable 2.6 per cent, while one year ahead was 3 per cent, the top of the policy range.
2. Of course, consumers see the price at the petrol pump now and expect inflation to be higher while the war continues, but if there’s evidence of that being baked in, I haven’t come across it.
3. A thrust of the ill-thought RBA review was greater transparency. Given the closeness of the vote and, in particular, the majority of “outsiders” disagreeing with the bank, the goal of greater transparency should deliver fair coverage of that alternative opinion. We haven’t been given that.

There was a suspicion that Treasury welcomed the RBA review because it would weaken the bank after decades of the Martin Place mandarins being seen as superior to the Canberra mandarins, ever since Paul Keating, as Treasurer, started paying more attention to the RBA than his own department. That has now been achieved.

Central banking is a tough gig. It’s someone else’s quote about a different central bank, but it applies here:

Right decisions are not remembered, and wrong ones are never forgotten.

The jury is out on whether this week’s decision will prove to be right or wrong. It’s a legitimate argument that higher energy prices will themselves put a brake on demand that doesn’t need the extra monetary squeeze, an argument that the RBA board’s vote will keep front of mind.

YOURDEMOCRACY.NET RECORDS HISTORY AS IT SHOULD BE — NOT AS THE WESTERN MEDIA WRONGLY REPORTS IT — SINCE 2005.

         Gus Leonisky

         POLITICAL CARTOONIST SINCE 1951.