Wednesday, 22 May 2019

RBA governor tries his hand at blame-shifting

Apparently the RBA governor has 'gone political' and given a post-election speech suggesting that the government ought to look at other ways to lower unemployment (such as increased infrastructure spending or industrial reforms to boost employment growth), rather than rely on the RBA cutting interest rates:

However, there seems to be an opinion that recent low unemployment levels may (after a lag of around a year) lead to higher inflation:

So I'm not sure that lowering unemployment should be a priority for the RBA or government, given that unemployment is getting pretty close to the rate that occurs naturally from a certain proportion of people always being in transition from one job to another.

Given recent moves by the RBA to put their previous inflation target band on the back burner (having failed to keep underlying inflation within the target) and instead focus on lowering unemployment, it seems that this might be a bit of self-interested bias by the RBA. Having found achieving their inflation target 'too hard', they've decided to shift the focus to unemployment rates, and then wash their hands of that too, but saying that there isn't much scope to cut rates any further, so its now the government's responsibility to do something.

Given the supposed sanctity of the RBA being independent in terms of setting interest rates free from government interference, it seems a bit inappropriate for the RBA governor to now be offering the newly re-elected government 'helpful' advice on where their budget priorities and IR policies should head.

There are of course aspects of unemployment that still need to be addressed: underemployment (those in one of more casual or part-time jobs that would really like to be working full-time in a permanent position), regional unemployment, youth unemployment, indigenous unemployment, age discrimination in employment and so forth. But focusing on getting the 'headline' rate of unemployment below 5.x does not seem to be valid 'top priority'. Especially if that could lead to a break-out in inflation.

This shift in RBA focus from inflation targets to the unemployment suggests the 'recency effect' is at work - tending to give excessive weight to the latest information. Having now 'beaten' inflation to such an extent that it is often below the lower limit of the RBA's own 'target band', the RBA might be assuming that (high) inflation can't reoccur. An over-emphasis on getting unemployment rates even lower may risk inflation taking off again. It could also happen at just the wrong time - when the US-China trade war could potentially reverse the decades long trend in cheap Chinese products 'exporting' deflation to the developed countries.

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