Personal reflections by Gene Tunny, Director, Adept Economics
One of my roles is President of the Economic Society of Australia (Queensland). At our 2024 business lunch, RBA Deputy Governor Andrew Hauser delivered a compelling speech titled Beware False Prophets. He cautioned against making overconfident predictions about the economic outlook. He suggested that critics of the RBA, whether advocating for higher or lower rates, are overconfident in their cash rate calls.
The speech gave me a greater appreciation of the RBA’s challenges as it attempts to keep the economy on the narrow path between persistently high inflation and recession. The Deputy Governor highlighted how various types of uncertainty (e.g. measurement issues, unobservable factors, and uncertainty regarding underlying relationships) mean that policymakers must be careful when adjusting interest rates. Given the uncertainty, there is a significant risk they could choose an inappropriate cash rate, with adverse economic consequences.
The Deputy Governor’s speech is one of the best explanations yet of the reason the RBA follows an incrementalist approach to setting the cash rate–that is, preferring usually to adjust it in quarter percentage point (or 25 basis point) increments. It also tells us why the RBA will likely be cautious about cutting the cash rate in the coming months. It will probably want to see data confirming inflation is returning to the 2-3 percent target band or the unemployment rate is climbing significantly. It recognises that it could cut rates too soon and fail to keep inflation on a path back to the target band, to the long-term detriment of the Australian economy. It was a frank and thought-provoking speech by the RBA Deputy Governor.
Thanks to Morgans Financial, a Queensland Business Leaders Hall of Fame inductee, for sponsoring the lunch and its Chief Economist, Michael Knox, for facilitating an excellent Q&A session.
If you’re based in Queensland and not already an ESA QLD member, please consider joining the Society to help advance the study and application of economics in Queensland. You can find out more via the ESA QLD website: https://esaqld.org.au/
Seated (Left to right): Michael Knox (Morgans), Deputy Governor (Andrew Hauser). Standing (Left to right): Louisa Coglan (QUT, ESA QLD), March Upcher (ESA QLD), Gene Tunny (ESA QLD, Adept Economics), Karen Hooper (Queensland Treasury), Frederique Brocaud (WEN, UQ).
Published on 13 August 2024. For further information, please email us at contact@adepteconomics.com.au or call us at 1300 169 870.
