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The RBA deserves kudos for a job well done

Over the past few years, the Reserve Bank of Australia (RBA) has been subjected to a blizzard of criticism from all corners for being too slow to react, not lifting rates enough, being too slow to cut rates and being economic troglodytes in general, clinging to discredited, outdated theories of how the economy really works.

The 2023 Government Review into the RBA found that:

  • Between 2016 and 2019 interest rates at 1.5% p.a. were too HIGH
  • While the actions during the pandemic were decisive, the board had too many generalists and not enough specialists who truly understood how the economy worked
  • They responded too slowly to rising inflation in 2022 due to limitations in their modelling and data sources

Governor Philip Lowe was duly made to walk the plank. His replacement, Michelle Bullock, seems to have much of the same DNA as Lowe and, from the outside at least, RBA decision-making has continued much as before.

Private sector economists were, if anything, even more damning about the RBA than was the Government Review:

  • Between 2016 and 2019 interest rates were kept artificially LOW and sowed the seeds for the dysfunctional resource allocation in the Australian economy that is behind our appalling productivity data
  • It was obvious that the growth in the money supply from JobKeeper and other support programs were going to cause a surge in inflation – where was this in their models?
  • Not only were rate rises too slow, but they didn’t go nearly far enough
  • All classical economic modelling is useless in any event

Many from the private sector highlighted the Reserve Bank of New Zealand (RBNZ) as the very model of a modern, fast-moving, pro-active central bank. Under the muscular leadership of Adrian Orr, the RBNZ moved earlier than the RBA, lifted rates further and openly indicated that they expected a recession to result.

They were correct. The NZ economy has been in recession since 2023, the unemployment rate has increased from 3.2% to 5.1% at present and residential property prices have fallen by around 20%.

To put the unemployment data in context, the chart below shows the unemployment rate in New Zealand and Australia. If the RBA had followed the muscular example of the RBNZ, as so many had urged, perhaps Australia too could have unemployment at 5.1% and rising. The human cost of that would not be insignificant; an extra 166,000 Australians without work, probably an extra 150,000 Australian families desperately struggling to make ends meet.

And to what end? The second chart shows the annualised quarter-on-quarter inflation rate in New Zealand against those of Australia and the US. The third chart shows rate of services inflation, perhaps a better indicator of underlying inflation. For all the pain, New Zealand does not appear to have achieved better inflation outcomes than Australia.

In early March, Adrian Orr unexpectedly resigned his role as Governor of the RBNZ without warning or explanation. Perhaps none was needed.

And what of the US Federal Reserve? Like the RBA, they appear have avoided a hard landing while bringing inflation down. Nonetheless, the jury is still well and truly out as to whether they have actually tamed inflation. In the chart above, we see US services inflation is still running at above 4% (compared to 2.3% in Australia) and that is without any impact to date of Trump’s tariff and immigration policies. The Fed still has an enormous amount of work to do.

It may well be too early to declare the RBA’s battle with inflation won. Nonetheless, at this point, despite their flawed forecasting approaches, potentially destabilising changes in leadership and seemingly ponderous decision-making, perhaps the RBA has engineered that rarest of beasts, the fabled soft landing.

It’s time to give the RBA some credit for a job well done.

 

Tim Farrelly is the founder of farrelly’s Investment Strategy, an independent, specialist asset allocation research service for investment advisory firms in Australia and New Zealand. Tim is also a member of Portfolio Construction Forum’s core faculty of leading investment professionals, contributing to the Conference, Markets Summit, and Academy programs.

 

9 Comments
Steve
March 20, 2025

Much was made of Lowes comments that rates would stay low for 2+ years when in fact they rose much earlier. He had misled borrowers! I heard an interview he had some time ago and he explained the context of that statement which seems conveniently forgotten by most these days. Like the government during Covid, the Reserve bank were getting "expert" advice to best navigate the uncharted waters they were in. It seems like ancient history now, but the key was they were told vaccines were maybe 2 or more years away (based on historical vaccine development) and the virus was still quite lethal. Then the modern vaccines were developed in a matter of months, and also the virus mutated such that the life-threatening lung aspect was much diminished and covid became much more like good old flu. So the world opened up much faster than most experts thought possible and rates had to climb earlier as a result since the emergency had passed. Lowe took a battering over this but when you understand the background it was a very different situation. The only thing he did "wrong" was not to say "if things open up faster rates will rise earlier" but I understand the Reserve banks crystal ball still needs new batteries and he didn't see this.

Rob
March 21, 2025

Sorry, not that simple. It was a comment that simply did NOT need to be made - effectively a "rate forecast" two years in advance!!. Ever heard the US Fed or any other credible Central Bank forecast 2 years in advance??? It was dumb and it was misguided. You ask young families in the outer suburbs who took on debt that was almost free and then saw 13 rate rises whether they feel misled. To call this stuff up an interpretation of "medical advice" that somehow led to "interest rate predictions" is a nonsense and the really stupid part, is that he could have simply said, "we will rely on the data" like every other Central Banker does. As a reasonably old head I cringed when I first heard the comment and nothing has changed.

Davo
March 21, 2025

All very true. However, how silly would you be to borrow up to the hilt when rates were at historically low levels and not consider what would happen when they returned to ‘pretty normal’ levels. Not too hard to think through …even if the rates came back a year or so early, they were always coming back towards normal. As someone who had 19.4% (yes for real) back when we know to keep lots up your sleeve

Rob
March 20, 2025

"Job well done.." Really?

The Philip Lowe comment, that he actually NEVER needed to make, of "no rate rises before 2024" totally misinformed a relatively financially illiterate community and encouraged silly decisions, to take on excessive debt, that in many cases, is now causing excessive pain. It was a stupid comment and anything but "job well done"

Greg
March 20, 2025

I think most of the "excessive debt" which was taken on was for housing which is for the long term. The rise in rates was inevitable whether in 2023 or 2024 and in fact the rise in Australia was less than in other countries which has mitigated the pain. People who took on this excessive debt must take responsibility for the consequences.

John
March 20, 2025

Left out of the article is the RBA's disastrous QE and ultra cheap funding for banks that have cost taxpayers tens of billions of dollars. These programs were completely unnecessary and had little impact on the Australian economy. Those who presided over such waste should be sacked, with a much deeper clean out required.

KIm
March 20, 2025

John (above) -yes -and the housing market sky-rocketed to the detriment of those struggling to buy a home. Plus the unchecked migration intake. maybe a soft landing, but not in the housing market here.

Errol
March 20, 2025

Agree with Klm……the housing market was collateral damage. About time we considered fixed rate mortgages similar to the US which would afford some protection to the housing market and those with mortgages during these times, leaving one less thing for the RBA to consider and one less thing for the media to constantly bleat about and one less thing for politicians to politicise.

As for a job well done……


Tim Farrelly
March 20, 2025

John
Totally agree that the QE was a disaster that had little or no ipact other than on the Australian taxpayer . I suspect that could have been the primary reason Lowe was removed.
The article is really focussed on the RBAs setting of interest rate - which is their main job - and, relative to others, has had good outcomes.

 

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