How the RBA cheated Australian households
Given Australia’s strong economic growth supported by high export prices, low unemployment and evidence that wages are rising from a bland base, there is an attractive case for starting to normalize cash rates towards a non-contractive or expansionary cost of capital. The problem is that although the RBA has repeatedly alleged that this “neutral” rate is at least 2.5 percent (or a chunky 175 basis points above its pre-pandemic cash rate), the reality is that the RBA has no idea where “neutral” really is. You only know once you are there. Worthless prophecy The RBA’s 2.5 percent estimate is another estimate not worth the paper it’s written for – such as its view in early March 2020 that the pandemic was no big deal and then its subsequent overly pessimistic forecast for a deep recession. Given the unmatched sensitivity of the Australian economy – dominated more than others by more variable rate debt, rather than fixed interest rates – to interest rate changes, prudent policymakers will