Monthly inflation measure would have seen earlier rate cut: Paul Bloxham

The introduction of a monthly inflation measure "as used by almost all other OECD countries" would have seen a cautious RBA cut interest rates this month, says former RBA economist and current HSBC chief economist for Australia Paul Bloxham.

According to Bloxham, the Reserve Bank views rising or falling inflation as the “best guide to whether the economy is growing ahead of its potential”

“One thing that would help in this whole process, and a point we have raised before, would be to have a monthly inflation measure. Almost all other OECD countries have a monthly CPI and so do most developing economies,” he says.

“Indeed, if Australia had a monthly CPI, there is a good chance the Reserve Bank would have cut rates [in April].

“The alternative, of course, to having a more frequent CPI could be to have less frequent RBA meetings. Given their preference for waiting for CPI prints before moving rates, perhaps they should meet less frequently,” Bloxham says in a column for Business Spectator.

Bloxham says a reluctance to trust inflation forecasts and instead wait for the quarterly inflation data means the RBA has remained reactionary and adopted an "auto-regressive process" with regard to inflation and interest rate settings.

“Given the uncertainties associated with forecasting inflation, the Reserve Bank often deems that the lowest risk strategy is to wait for the next inflation print, rather than move ahead of it based on forecasts,” he says.

Such a low risk strategy was put on display at the April decision to keep rates on hold despite the RBA itself acknowledging in its monetary policy statement that economic growth was below trend and that a softening in labour market conditions had occurred in 2011.

Bloxham says the RBA is “very focused on actually seeing the trends in the CPI data” rather than trust its forecasts and has decided that the best way to meet its three goals - price stability, minimising unemployment and improving 'general welfare', is to set monetary policy consistent with maintaining stable inflation.

“Specifically, the bank seeks to maintain inflation 'between 2% and 3%, on average, over the cycle'. Of course this requires that it is forward-looking in its approach.

“But, at the same time, the Reserve Bank is highly sceptical about anyone's ability to forecast anything, including its own ability to forecast inflation," he says.

 Bloxham says there is clearly a trade-off for the RBA.

“Trust your forecasts more and move ahead of the CPI data, or, wait for the data but possibly fall into the trap of not being forward-looking enough.

 “When push comes to shove it seems the Reserve Bank mostly thinks it is better off waiting.

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer


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