Posts about monetary policy

RBA governor’s ‘Qu’ils mangent de la brioche’ moments of disdain

The RBA governor had a few ‘Qu’ils mangent de la brioche’ moments in the last week when he responded to criticisms that his manic interest rate increasing behaviour is driving low-income families into crisis by, first, saying that people who couldn’t find cheap housing should move back with their parents. Then he followed that with the recommendation that people should work harder and get second jobs if they couldn’t make ends meet as a consequences of the squeeze on their mortgage payments from the RBA’s monetary policy changes. Nice. This is an extraordinary period of policy chaos – we have an out-of-control central bank pushing rates up and using various ruses (chasing shadows) to justify the hikes, when inflation is falling anyway for reasons unconnected to the monetary policy shifts. All the RBA will succeed in doing is increasing unemployment and misery. The unemployed will ultimately bear the brunt of this chaotic policy period. But then ‘Qu’ils mangent de la brioche’ and they can move back in with their parents!

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Rising labour costs have only the smallest impact on services inflation

As the inflation episode starts to abate, central bank governors have been keen to advance narratives to justify why they would continue hiking interest rates, especially when it is pretty obvious that the drivers of the inflation were mostly coming from the supply-side and suppressing aggregate spending (via the higher rates) would not be a very effective measure to deploy. This is quite apart from the debate as to the effectiveness of using interest rates to stifle spending, which is a separate discussion with no clear conclusion other than probably not. As I have noted previously, it was hard to argue that inflation was accelerating out of control when it had started to decline many months ago. So they had to come up with a different narrative – which was that while inflation was falling it was not falling quickly enough. That is the current story line the officials trot out. And that allows them to claim that if it doesn’t fall quickly then two things will be likely: (a) workers will build the higher inflation into their wage demands and set off a wage-price spiral that becomes self-fulfilling even after the supply-side factors (Covid, Ukraine, OPEC) abate, and (b) that people would start to expect higher inflation was the norm and build that into the contractual arrangements and pricing. Neither behavioural phenomenon has shown any sign of becoming entrenched, which leaves the central bank officials without a cover. And even research from central banks themselves is demonstrating that there is not ‘high inflation’ mindset taking over.

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Australia – inflation still falling while the RBA governor keeps inventing ruses to keep hiking rates

It’s Wednesday and there is a lot going on in the data release sense – housing finance, construction and today, the Australian Bureau of Statistics released the latest – Monthly Consumer Price Indicator – which covers the period to April 2023. On an annual basis, the monthly All Items CPI rate of increase was 6.8 per cent down from 6.9 per cent. There is some stickiness in some of the components in the CPI but overall inflation peaked last year and is slowly declining as the factors that caused the pressures in the first place are abating. Tomorrow I plan to discuss an apparent tension in the Modern Monetary Theory (MMT) community as to whether interest rate increases are expansionary or contractionary. But today we just consider the data and then listen to some dub.

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Inside the Bank of England governor’s dreams – the wage-price spiral we cannot see

Many central bank officials have been trying all sorts of conditioning narratives to convince us that their interest rate hikes have been justified. Now they are actually defying the information presented in the official data to simply make things up. Last Wednesday (May 17, 2023), the Bank of England governor gave a speech to the British Chamber of Commerce – Getting inflation back to the 2% target − speech by Andrew Bailey. It came after the Bank raised the bank rate by a further 25 points to 4.5 per cent the week before. In that speech, he admitted inflation was declining and the main supply-side drivers were abating. But he said the rate rises were justified and unemployment had to rise because there was now persistent inflationary pressures coming from a “wage-price spiral”. The problem with this claim is that there is no data to support it.

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No evidence of an imminent wages breakout in Australia despite the claims by the RBA to justify their hikes

Today (May 17, 2023), the Australian Bureau of Statistics released the latest – Wage Price Index, Australia – for the March-quarter 2023, which shows that the aggregate wage index rose by 0.8 per cent over the quarter (steady) and 3.7 per cent over the 12 months. The media are touting how strong the wages growth is but they should be focusing on the fact that Australia’s nominal wage growth remains well below that necessary to restore the purchasing power losses arising from price level inflation. Even though the inflation rate is falling significantly and nominal wages growth has picked up a bit, the problem still remains – real wages have now fallen for 8 consecutive quarters (2 years). Further with the gap between productivity growth and the declining real wages increasing, the massive redistribution of national income away from wages to profits continues. Further, the conduct of the RBA in this environment is contributing to the damage that workers are enduring. They continue to claim there is a threat of a wages breakout and so interest rates have to keep rising to create the necessary unemployment increase to prevent that from happening. It is just a ruse. The rising unemployment will be for nothing other than to repress real wages furthers. And meanwhile, the RBA interest rate hikes are driving up prices (for example, via the rent squeeze).

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The end of the common currency (euro) cannot come soon enough

In my 2015 book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015) – I traced in considerable detail the events and views that led to the creation of the Economic and Monetary Union (EMU, aka the Eurozone) once the Treaty of Maastricht was pushed through as the most advanced form of neoliberalism at that time. The difference between the EMU and other nations who have adopted neoliberal policies is that in the former case the ideology is embedded in the treaties, that is, in the constitutional system, which is almost impossible to change in any progressive way. In the latter case, voters can get rid of the ideology by voting the party that propagates it out of office. It is true that in current period, even the parties in the social democratic tradition have become neoliberal and there is little choice. But the EMU is different and has entrenched the most destructive ideology in its legal structures. We are reminded of this recently (April 26, 2023), when the European Commission released its latest missive – Commission proposes new economic governance rules fit for the future. Once operational, the policies advocated in this new governance structure will ensure that Europeans are once again made to endure persistent and elevated levels of unemployment and continued deterioration in the quality and scope of public infrastructure and welfare provision. The collapse of this ideological nightmare cannot come soon enough.

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Japan has lower inflation, no currency crisis and its citizens are better off as a result of the monetary-fiscal policy initiatives

The – Washington Consensus – has been out in full force this week with the US Federal Reserve and the RBA increasing interest rates further despite all the indications that inflation peaked months ago and its downward trajectory has had little if anything to do with the ridiculous interest rate rises since early 2022. Both banks, along with most other central banks, are just thumbing through the New Keynesian textbook to get their direction and pretending to be capable of assessing the situation correctly. Neither the textbooks nor the assessments are remotely accurate and unnecessary pain is just being inflicted on low income mortgage holders. But the public barely know that there is a grand global experiment being conducted by central banks which allow us to reflect on the veracity of competing economic theories and approaches. Most central banks are hiking rates at present as a reflection of the dominance of the New Keynesian prioritisation of monetary policy as a counter-stabilising, anti-inflationary policy tool over fiscal policy. One central bank is not following suit – the Bank of Japan. The BOJ has not shifted rates, is maintaining its yield curve control policy and the government is expanding fiscal policy. The diametric opposite to the New Keynesian approach. We now have enough data to assess the relative merits of the two approaches. Japan has lower inflation, no currency crisis and its citizens are better off as a result of the monetary-fiscal policy initiatives.

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RBA loses the plot – Treasurer should use powers under the Act to suspend the RBA Board’s decision making discretion

It’s Wednesday, and we have a few observations on recent events including a music feature. But the main issue in the last 24 hours is the decision by the Reserve Bank of Australia (RBA) to add an 11th interest rate increase at a time when inflation is falling significantly. As I noted last week, the narrative is now shifting among these characters – it is all about inflation not falling ‘fast enough’ and they still claim a wages explosion is likely unless they get inflation down more quickly. It now appears to me that the RBA has lost the plot completely. I have written regularly about this in the last 12 months, but today I have been exploring new data which shows that rising interest rates create a vicious circle of higher inflation which then precipitate further higher interest rates. My recommendation is that the Federal treasurer should use his powers under the RBA Act 1959 and overrule the RBA governor and his board and freeze interest rates. We have to stop this RBA madness somehow!

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Australian inflation rate has peaked and falling fast – but not fast enough for the interest rate boosters

Today (April 26, 2023), the Australian Bureau of Statistics released the latest – Consumer Price Index, Australia – for the March-quarter 2023. It showed that the CPI rose 1.4 per cent in the quarter (down 0.4 points) and over the 12 months by 7 per cent (down 0.8 points). The monthly data, also released today (which I do not analyse here) shows inflation dropping from 7.4 per cent in January to 6.8 per cent in February to 6.3 per cent in March. Significant downward trend as the supply factors abate. Taken together we conclude that the peak has now passed, which is consistent with my assessment that this would be a transient, supply-driven event. There are no wage pressures and inflationary expectations are in decline or steady. The laughable thing is that as the rate falls, the mainstream narrative, which continues to push for higher interest rates, has shifted from a focus on the inflation rate itself to the claim that it is now not falling fast enough. The claimed fears are now that the longer it remains at elevated levels the more chance there will be of a wage-price spiral breaking out and/or accelerating (un-anchored) expectations. Neither are likely given the situation before us and that leads to the conclusion that these interest rate boosters are just exuding hot air as usual. The major sources of price increases are temporary and in the March-quarter are the direct result of discretionary government administrative arrangements (indexation arrangements etc), which could easily be waived this year. The correct policy response should be to provide fiscal support for lower-income households to help them cope with the cost of living rises at present. Increasing interest rates again will not solve the problem that is already abating.

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The inflation backtracking from the central bankers and others is gathering pace

Remember all the hype from central bankers last year and earlier this year about how they had to get ‘ahead of the curve’ with their interest rate hikes just in case wage demands escalated and inflationary expectatinos became ‘unanchored’. Over the last 18 months, I consistently noted in various blog posts that this was all a ruse to create a smokescreen to justify the unjustifiable rate rises – given that the inflationary pressures were almost all coming from the supply side and those forces were temporary and abating. Well now, the mainstream, having pushed for the rate rises and got their way are now backtracking to maintain their credibility by claiming there are no wage-price dynamics in sight. It is a dystopia.

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