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Strong 'retail flavour' on RBA Board creates dovish bias

Christopher Joye
15 August 2011

A good article by Michael Dwyer in the AFR. He notes, as I have, that the conflicted business executives on the RBA Board hold a voting majority, and questions whether they have been responsible for the RBA keeping policy on hold while both experiencing and forecasting above-target inflation. The tom-toms have started, as I expected. This is not great news for the RBA's credibility:

“[J]ust six days after the release of figures showing the consumer price index had jumped to a two-year high of 3.6 per cent, the Reserve Bank stayed its hand.

“It was the eighth consecutive decision by policymakers to keep interest rates on hold and came in the face of the sort of inflationary pressures that normally ring alarm bells in the corridors of the central bank’s Martin Place headquarters.

“Inflation is now well above the Reserve Bank’s target band of between two per cent and three per cent. While the central bank’s decision now appears justified, given the past week’s turmoil on global financial markets, retailers must have felt at least partially vindicated.

“Structural change is something people rarely find comfortable in the short term, even though a capacity to adapt is a characteristic displayed by the most successful economies,” Stevens said last month.

“Yet it remains to be seen whether the five business people who hold a majority on the nine-member Reserve Bank board see structural change in quite the same way. The current board membership has a particularly strong retail flavour.

“Fairfax Media chairman Roger Corbett, who has been involved in the retail industry for four decades including a stint as chief executive at Woolworths, has been a member since late 2005 and will remain on the board until 2015.

“Earlier this year Corbett described the economy as “bipolar”, noting that the average Australian could rightly ask, “How is it we are going through the biggest resources boom in the nation’s history and at the same time I am finding it quite hard to make ends meet?”

“Then there is Jillian Broadbent, appointed to the board in 1998 and its longest-serving member, who has been a director at Woolworths since the start of this year and was previously on the board of Coca-Cola Amatil.

“The votes of the Reserve Bank board are not published, unlike at the Bank of England, so it’s impossible to know how close this month’s decision to keep rates on hold was. But the central bank has only raised its cash rate once since May last year, despite the knowledge that inflation was destined to creep above its target band.

“The modelling suggests monetary policy typically has its largest effect on the economy with a six- to 18- month lag, so retrospect would suggest that the Reserve Bank should not have hesitated last October and rates should have been lifted twice in the second half of 2010,” says HSBC chief economist Paul Bloxham, who worked at the central bank for 12 years.

“That would have put additional downward pressure on inflation and perhaps given the Reserve Bank more room to move this year or next in the event of a [major] downturn.”

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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