It’s weird to be perhaps the most ardent critic of a nation’s central bank, and yet, I guess that’s where I find myself as I look at what the Reserve Bank is doing and how few others seem willing to do anything other than cheer for more rate rises.
Last Friday, the Bureau of Statistics revealed that, for the first time, 1 million Australians were working multiple jobs. Close to 7% of everyone with a job is now working more than one job:
People don’t work more than one job because they’re bored. They do it because their primary job doesn’t earn enough money to pay the bills – and the RBA’s three rate rises this year played a big part.
That’s the reality of where we’re at.
But right now, the main concern of the economy is not reality, but expectations.
Two weeks ago, investors (or speculators if you are less kind) on the futures market were pricing in the odds of the RBA raising interest rates once over the next 18 months at around 50:50.
This was fair enough. The most recent data showed annual private sector wage growth falling to 3.1%, and in July unemployment rose to 4.5%.
Why would you look at that reality and think the economy needs slowing?
And yet by Wednesday last week, a rate rise by November was fully priced in and the odds of two rates rises by this time next year were more likely than not.
What had happened in between those 10 days?
Expectations.
First, the inflation figures for July were released showing official inflation fell from 3.8% to 3.5%. This fall was not as much as ‘expected’ and so up went the odds of another rates rise.
Was this a sign the economy was doing well? Nope.
Even when you dug into the figures, the increase of market sector services prices fell from 3.7% to 3.3%. This is important because, as a rule, when services prices start rising that means wages are going to follow – services require people to do those jobs.
But pfft, up went the expectations of a rate rise.
Then last Wednesday the June quarter GDP figures were released.
These came in at a lousy 0.4%. Over the past 30 years, the median quarterly growth has been 0.7%. So we’re way down on that – in the bottom third of performance.
But because economists had expected growth to be 0.3%, once again expectations came out to play. Yes, economic growth was crap, but it was less crap than we thought so up went the odds of a rate rise – heck up went the odds of two rate rises!
The reality is that our economy is growing at basically half speed, inflation is falling, wage growth is falling, and unemployment is rising. But the expectations are still that the RBA will raise rates because they think this really is not as bad as was expected.
And to be fair, were I a future trader I’d be betting that as well.
The RBA has made no secret of looking for any excuse to raise rates to show their toughness in the fight on inflation.
This was how they were back in 2022 and 2023, when they raised rates 10 times in a row, took a month break and then raised them two more times.
My colleagues at the Australia Institute and I pointed out at the time in a number of research papers that the national accounts showed the main cause of inflation in 2022 was rising profits. Despite this happening in the US, UK and Europe, for some reason the RBA decided that Australian companies were very stupid and unique among the western world by not inflating their profits.
The RBA didn’t just disagree, it saw it as a fight it needed to win. It sent out the assistant governor to brief the ABC and Guardian about why we were wrong on background, and included a section in its May 2023 Statement on Monetary Policy about why we were wrong officially.
We weren’t.
The RBA last month produced research that looked into the issue and found that “Business owner returns (a polite way of saying profits) also accounted for a significant part of the growth in the household consumption deflator over 2022 … By contrast, labour costs … accounted for a relatively small part of the growth.”
Ahh well not wrong for long, I guess.
Except the issue is this is not just a historical curio.
We can analyse the latest GDP figures to see what is driving inflation just like we did in 2022. And the increase has again been driven by profits – not as much as in 2022, but it is there all the same:
And yet, the RBA remains willing to raise interest rates, knowing the biggest impact will be on wages and employment. At best it will drive more people to work more than one job – at worst it will see more people with no jobs.
I struggle every day to understand how the RBA which presumably has some smart, experienced and educated people on it, continue to 1) willfully ignore analysis that shows their methods of tackling inflation aren’t clever enough and 2) shit all over ordinary Australians because that’s easier than admitting to 1). thinking a healthy economy depends on higher unemployment is appalling. But they’re cocooned from it so why care, huh? 🤔
You judge an organisation objectively by its outputs, and the Reserve Bank is objectively an organisation designed to make workers pay the cost of economic instability.