Compared to what
A day after the RBA’s latest 25 basis point cash rate hike, Australia’s Assistant Treasurer Stephen Jones said:
“The government thinks that inflation has peaked.
We think what’s already in the system should do the job to ensure that we can dampen down demand.”
That’s a bold claim. Stephen Jones is a union lawyer by trade, and from what I can gather the Assistant Treasurer/Minister for Financial Services gig is his first portfolio. It’s probably safe to say he’s not an expert on monetary policy and should perhaps show some humility; macroeconomics is riddled with uncertainty and there’s no way that he could know, with any confidence, that the rate of inflation has peaked.
In its monthly statement the RBA was much more cautious, predicting that:
“Inflation is expected to decline this year due to both global factors and slower growth in domestic demand.”
We don’t yet have any official inflation data for this year – not even the ABS' less accurate monthly series – with January’s figures due out in March. That gives the RBA around ~13 months for inflation to moderate, or closer to 15 months if it’s using the quarterly report (which it no doubt will).
But for Stephen Jones? Nope – any rise in the rate of inflation this year means he will be wrong. And his government will be wrong, given he didn’t say “I” think inflation has peaked, but that “the government” does.
Such forecasts risk his and the Albanese government’s credibility. And credibility and monetary policy are in short supply these days: recall that the RBA, which was a year late to hike rates, also naively attempted to manage expectations through its now-infamous ‘no rate hikes before 2024’ claim.
But enough with the RBA bashing – there’s an important lesson here. Anyone calling for an end to, or watering down of, central bank independence should ask: compared to what. The alternative, i.e. central banks falling further under the influence of politicians such as Stephen Jones, will almost certainly lead to even worse outcomes.