The Reserve Bank abandoned the last elements of its focus on wages growth, declaring it was a mistake to link its pandemic-era forecasts about interest rate rises to wage rises, as part of a broader admission that it should not have put such a long timeframe on its interest rate forecasts in 2020-21.
That mistake has condemned millions of Australian workers and their families — especially lower-paid workers in essential areas such as health, aged care and services, and renters — to again being the underclass of economic growth while older asset-holders enjoy the benefits.
The bank’s internal review of its “forward guidance” during the pandemic acknowledges its constant statements that interest rates were unlikely to rise before 2024, when the bank expected inflation to be back in its 2-3% target band, “led to considerable reputational damage to the bank. When the cash rate was increased in May 2022, many people saw the bank as having broken ‘its promise’.”
Now, the bank says:
A less specific timeframe, or one covering a shorter horizon, would have been preferable. Given the outlook was highly uncertain, the board could have given more consideration to potential upside scenarios, including scenarios that could warrant the board raising the cash rate earlier than anticipated.
The bank’s admission its actions led to people being misled will be cold comfort to borrowers who based key life decisions such as purchasing a home on the belief that interest rates would remain at near-zero levels for three years.
Even so, the broader context for the RBA’s miscommunication (at best) or breach of faith (at worst) shouldn’t be ignored: its more fundamental problem was that it (understandably) misread the nature of the economic impact of the pandemic in an era when working from home and e-commerce had changed employment and consumer demand, and (less understandably) failed to realise how much massive government stimulus via JobKeeper and JobSeeker increases would prop up demand.
More strident than its acknowledgment of the reputational cost of its miscommunication on timing, however, is its dismissal of wages growth as an important indicator.
For a time between 2018 and 2021, the RBA was the only important economic policymaking body that recognised the importance of ending years of wage stagnation for Australian workers, and wages growth became an important part of its forward guidance for when inflation would be high enough to warrant an increase in interest rates.
… The board regularly referred to the outlook for wages as an important indicator for assessing whether or not inflation would be ‘sustainably in the target range’. Over time, it became incorporated into the board’s state-based forward guidance and was a key criterion discussed in the decision to raise rates in May 2022.
Now the bank regrets that: “This further complicated the messaging, with many commentators interpreting the board as having a wages target … This focus on wages could have also down-weighted other important factors that can drive inflation. Some criticised the board for relying on liaison data on wages rather than more conventional indicators.
Well, that would be us here at Crikey, who have consistently expressed scepticism about both the RBA and the government’s wages growth forecasts, and suggested the bank’s liaison program with business gave the bank an absurdly optimistic view of wages growth when both businesses and the Coalition were dedicated to screwing down wages as far as possible with the help of a bargaining system tilted against workers.
The most recent wages growth figures, for the September quarter, were released today, and only reached 3.1% annual growth — the highest figure in years — because of the Fair Work Commission’s midyear decision to grant a $40 a week minimum wage increase for low-paid workers, which according to the Australian Bureau of Statistics “was a significant contributor to hourly wage rate increases in the retail trade, administrative and support services, accommodation and food services, public administration and safety and healthcare and social assistance industries”.
What’s bizarre about this dismissal of wages growth is that it comes after governor Philip Lowe began warning of a wage-price spiral after the most recent RBA board meeting, an outcome that Australian workers can only dream of as they endure the biggest falls in real wages in decades.
But it marks the full reversion of the RBA into neoliberal orthodoxy after a dangerous period in which it actually focused on economic outcomes for workers and the impacts of a heavily skewed economic policymaking apparatus on the real economy.
Are you OK with the RBA “apologising” now for its “miscommunication”? Let us know by writing to letters@crikey.com.au. Please include your full name to be considered for publication. We reserve the right to edit for length and clarity.
