The Disconnect Underlying This Economic Miracle

(Bloomberg Opinion) -- There’s a jarring disconnect at the heart of Australia’s 28-year economic miracle.

The direction of the central bank’s latest forecasts has been clear: Estimates for the pace of growth were axed to 1.75 percent in the year to June 30, compared with 2.5 percent anticipated just three months earlier. Inflation, hovering below target since 2015, won't climb back to the lower end of the Reserve Bank’s 2% to 3% target until 2020.

Thursday's jobs statistics don't offer much succor, either. While employment rose 28,400 in April, exceeding private-sector forecasts, the gain was concentrated in part-time work. The number of full-time positions fell.

This would seem to suggest that an interest-rate cut is on its way. If only officials could bring themselves to say so, in their coded central bankspeak. 

But this hasn't happened. A small majority of economists thought the RBA would cut its main rate on May 7, only to have those calls dashed. Just to rub it in, the central bank’s statement even struck a hawkish note. Not only did Governor Philip Lowe pass on that opportunity, he left some economists wondering whether he would act at all this year.

In an era when markets are used to central banks holding their hands with unambiguous communication, this came as quite a shock. The RBA is one of many monetary authorities that explicitly targets inflation. Just a few weeks before, data showed the pace of price increases last quarter was disappointingly low – a point the RBA did acknowledge. So what's up?

Explanations for the central bank’s reticence range from the proximity of national elections this weekend to the idea that the economy isn't in such terrible shape after all. Rates have remained unchanged now for the longest period on record. Perhaps Lowe wants to make his first adjustment really count, and establish a bulletproof case before moving. 

Judging from the central bank’s forecasts, Lowe appears to be pinning the trajectory of inflation to gains in the labor market. That’s starting to look too optimistic given the jobless rate nudged up to 5.2 percent in April and won't dip below 5 percent until 2021, based on the central bank's projections last week.  

There may be yet another explanation beyond all the targets and numbers: the instincts of the person in the corner office. Sally Auld of JPMorgan Chase & Co. may be on to something in her assessment of why the RBA demurred last week, contrary to her call for a quarter-point cut. “In the end, we think the explanation is simple – Lowe is a more hawkish Governor than most appreciate, and the hurdle for easing is clearly a lot higher than it has been under previous Governors,” she wrote. “In that respect, we learnt a lot.” 

Leadership, in the end, may matter more than fan charts and dot-plots. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

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