Asleep at the wheel

Being asleep at the wheel. Being like a rabbit caught in the car’s headlights and too frightened to move. Struck dumb. Several phrases, none of them polite, but each of them could be applied to the senior executives of Australia’s Reserve Bank, the RBA. No competent person in a position of authority at the RBA would keep in place the current monetary policy settings.

The key function of the RBA is to preserve the value of the currency. The bank has interpreted this as keeping the annual rate of price inflation in the range 2% to 3% pa on average over the business cycle. The tools available to the bank to manage this are blunt and limited, predominantly managing interest rates via a number of means. In essence, the RBA can set a base rate of interest, the cash rate, which then serves as a reference for other rates. Higher interest rates are a tool for slowing an economy, lower rates for stimulating it.

Now look at the following two graphs: one is the recent history of the cash rate in Australia, the other the inflation rate.

Inflation rate, %pa. Source:

Inflationary pressures have been coming for a long time. It was obvious to anyone caring to look that by the time the economic stimulus came around in 2020, (to fix the damage done by Government policies to fight COVID19), inflation expectations rapidly turned into actual inflation.

What the graphs show is that the RBA has not acted to combat inflation. The cash rate remains at 0.1%pa. Yet prices have been increasing rapidly since 2020. Given more recent events, it appears that the price inflation is going to get worse, probably much worse. Meanwhile, the RBA executives are staring at a headlight, or they are asleep at the wheel. Or simply struck dumb. The consequences of this inaction will be worse every day this farcical monetary policy setting is maintained.

Update: on 3 May 2022 the RBA announced an increase in the cash rate from 0.1%pa to 0.35%pa.

Look at what the Governor said: “left the bank with little choice”. Memo, Governor: if you wait until there’s no choice, you are following and reacting, not leading. You aren’t doing your job. I think you should consider your position.

Another update:

I’m calling BS on this. Lowe blames pandemic forecasters for not raising rates earlier. When did those forecasts emerge? 2020. Who does the fool blame for continually reducing rates since 2011?