Central banks, including our own, the Reserve Bank of Australia (RBA), have become “much more aggressive” in raising rates, in part because memories of the prolonged period of soaring inflation at the end 1990s are still very fresh, said Dr. Shane Oliver. on a recent episode of the ifa show, hosted by InvestorDaily’s sister brand.
“The memories of those who consulted the history books or were there at the time go back to the 1980s, when the US central bank under Paul Volcker decided to eliminate inflation from the system. And then we had two recessions in a row in the United States, we had a recession in Australia,” said Dr Oliver.
“That’s the big problem here. And obviously the risks have increased because you have all these shocks on top of each other,” the chief economist added.
It is no secret that the RBA was quite surprised by the rapid rise in inflation. Just a few months ago, the central bank stubbornly reiterated its rate target for 2024, before pivoting quickly at the end of 2021 with the abrupt flattening of the yield curve after realizing that things were not developing as expected.
According to Dr Oliver and the RBA’s own Philip Lowe, this seriously damaged the reputation of the RBA.
Moving forward, Dr Oliver believes the RBA’s best course of action is to raise interest rates “relatively aggressively” in the near term before pausing to think things through later this year.
“I think ultimately we’re not going to see interest rates at 4%, which is what the money market is talking about,” he said.
Instead, Dr. Oliver is confident that rates will end at around 2.1% in December.
“We believe that given the increased sensitivity of Australian households to higher interest rates due to higher debt levels, the Reserve Bank will not have to and will not go to these very high levels. “, noted Dr. Oliver.
“I think the Reserve Bank is not stupid, they know there is more debt there. They know people are more sensitive than in the past to higher interest rates. also knows that there has been a big blow to household incomes, ”he continued.
“So I think the Reserve Bank won’t ignore these things and therefore won’t have to raise interest rates as much as many fear in this environment.”
In June, while admitting that reputational damage had been caused by some of the bank’s more questionable decisions, the RBA admitted that in hindsight the yield target could have been scrapped sooner.
“In retrospect, given the evolution of inflation and the labor market, an earlier end to the performance target would have been appropriate,” he said in a report summarizing his review of the use of the yield curve control policy.
The RBA is expected to undergo an independent review soon. In May, some of Australia’s top economists wrote a letter to Treasurer Jim Chalmers demanding that a review of the RBA be led by an “internationally recognized overseas expert”.
The bank has not been scrutinized since the early 1980s.
Maja Garaca Djurdjevic
Maja’s career in journalism spans more than a decade in finance, business and politics. Now a writer and journalist with experience in all elements of the financial services industry, before joining Momentum Media, Maja reported for several established media outlets in South East Europe, examining key processes in post-conflict societies.