Last year the government announced it was considering removing its statutory power to overrule the Reserve Bank. Thankfully it has now reconsidered that move, and the actions of the RBA over the past year serve to remind everyone that it is far from infallible.
In its May Statement on Monetary Policy the RBA looked ahead one month and estimated that in June the annual growth of household consumption would be 1.1%. When the national accounts were released last week, the actual growth was revealed to be just 0.5%.
Now obviously economic forecasting is a bit of a mugs game, but household consumption makes up half of Australia’s economy and accounted for around 45% of all the growth in the economy over the past decade so it is pretty important. It is also the area of the economy most directly affected by interest rate rises. This error of forecasting suggests that the Reserve Bank has rather poorly misread just how greatly households had been impacted by the 13 rate rises that had taken the cash rate from 0.1% in April 2022 to 4.35% in November 2023.
This error is crucial because the main reason the RBA raises rates is to reduce the ability of households to spend. Because you can’t tell your bank that you don’t really feel like paying your mortgage this month, interest rate rises force households to divert money that would have been spent on goods and services to paying your mortgage.
