MARTIN, the Reserve Bank’s macroeconomic model, may not quite approximate the rogue HAL 9000 computer of 2001: A Space Odyssey. But stressed-out mortgage holders can probably relate to astronaut Dave’s vulnerability to a machine.
After all, didn’t inflation plunge to a two-year low in the December quarter to 4.1%, heading for the RBA’s 2%-3% target range?
And with consumption wilting – per capita retail turnover has sunk for six consecutive quarters to be 3.5% lower than a year earlier – surely household pain might be eased by a clear signal that interest rate cuts can’t be too far off.
Not according to the RBA governor, Michele Bullock. Perhaps, stung by predecessor Philip Lowe’s prediction that interest rates would remain at a record low 0.1% into this year, the newbie pilot is wary about making predictions.
“We haven’t ruled anything out and we haven’t ruled anything in,” Bullock told the media conference on Tuesday after the RBA’s inaugural two-day board meeting. Indeed, she said it even had to retain the option of a rate rise “because we need to be driven by the data”.
And it’s MARTIN crunching those numbers. The RBA is clearly fond of the powers of MAcroeconomic Relationships for Targeting INflation, to state its wonky name in full. It is, in fact, a model more advanced than that used by “many other central banks … built to strike a balance between theoretical rigour and empirical realism”.
The RBA is, of course, meant to target both inflation and full employment. The absence of the latter in the model’s moniker might be an accident since the name was obviously a reference to the central bank’s home in Sydney’s Martin Place.
Jonathan Kearns, a former senior RBA executive now at Challenger group, made the point last week that, by the MARTIN model’s own rules, monetary policy might not be tight enough to bring down inflation. The cash rate “should be over 5%” rather than the current 4.35%.
“A less restrictive policy stance in Australia does not appear to be justified by economic conditions,” said Kearns, who left his front-row role at the bank a year ago.
He notes, for instance, that Australia has historically had a higher real interest rate than the US “reflecting a greater risk premium and need to finance a current account deficit”.
We no longer have a current account trade deficit and a re-elected president Donald Trump might alter the risk calculus for the US. Still, America’s inflation rate is down to 3.4% while its key interest rate is 5.25-5.5%.
“The RBA has increased the cash rate by less than the Fed has increased its policy rate, despite inflation in Australia currently being higher,” Kearns said. “This indicates that monetary policy has not been tightened as much here as in the United States.”
What’s that got to do with what the RBA will do next?
Well, Bullock did stress that the board looked closely at the jobless rate to make sure it didn’t rise too fast, as higher interest rates squeezed excess demand from the economy.
Unemployment “gets a lot of attention in board meetings”, she said. “We’re very conscious that employment is very important for people. It’s important for them meeting their financial obligations, obviously. It’s important for good mental health reasons and so on. It gets a lot of consideration.”
However, the bulk of Bullock’s comments were about getting inflation back down to earth.
“We need to make sure that we don’t have to backtrack on inflation, that inflation doesn’t get away,” she said.
“We are making progress and we need to be convinced that that progress is going to continue.”
To cut rates too early, in other words, would be like going outside an emergency airlock without a space helmet.
