RBA decision puts egg on economists' faces

Posted on 7/06/2011  

The RBA decision today to keep interest rates stable has made fools of the many economists who predicted a rise as a certainty.

Since the RBA decision on 3 May not to lift interest rates, media has been giving us daily speculation about interest rates, cluttering up the information channels with the predictions of economists who crave media profile. Many predicted a rise of 25 basis points today.

For example, the Sydney Morning Herald on 26 May published an article headlined “Capex data points to June rate rise”. It quoted Nomura chief economist Stephen Roberts as saying that strong capital expenditure data “increased the likelihood that the RBA will increase the cash rate at its June board meeting from 4.75 %to 5%”.

He said: “The RBA needs to be pre-emptive in order to make sure there is space for this capex spending." Thankfully, the RBA board did not agree with Roberts.

ICAP senior economist Adam Carr also said that the strength in the data in the March quarter meant that “a cash rate rise by the central bank was looking like a near-term prospect”.

Economists also pounced on the Federal Budget in May as a reason to predict an interest rate rise in June. Commonwealth Bank of Australia economist James McIntyre said the enormous levels of investment in the nation's resources sector would force the RBA's hand shortly, while National Australia Bank chief economist Alan Oster said there was “nothing in the Budget to change the RBA's view that tighter monetary policy is required in the current environment." Oster predicted two rate rises by September.

A key reason why journalists – and the economists they quote – get it wrong so often is that they react to every scrap of data from the Australian Bureau of Statistics and place enormous interest-rates significance on each data release. Strong employment data in May was deemed to be strong evidence that the cash rate would rise today.

Roberts said this added further weight to his forecast of a rate rise in June. "I think the Reserve Bank has already made it pretty plain where they're sitting on monetary policy, which is rates have to be higher and probably sooner," he said. Oops.

Commonwealth Bank of Australia (CBA) chief economist Michael Blythe and ANZ senior economist Julie Toth also predicted interest rates rising sooner rather than later.

The Sydney Morning Herald, which seems obsessed with interest rates, generally told us to expect a June rate rise. John Collett, writing under the headline “First-home buyers beware”, declared bravely in May: “The next move in interest rates will be up. The only questionis whether it will be in the next month or in a few months time.”

Two days ago the SMH went further, with this headline: “Braced for rate rise? Steel for two.”

“Interest rates are going higher, and soon. It could be this week, it might be in a month, ormaybe the month after that, but they are going up. You can bank on it, economists say. Some, such as Deutsche Bank chief economist Adam Boyton, expect the Reserve Bank to move on rates as early as this week …” Oops.

Bill Evans, Westpac’s chief economist, told a post-Budget forum in May: “Interest rates will go up next month.” Newspapers reported: “Westpac had previously forecast rates to go up in the September quarter, but Mr Evans said a June move was now more likely.” Oops again.

So, what will media do when the same individuals, who got it so wrong by telling us to expect the rate rise that never arrived, predict a rate rise in July? My expectation is journalists will continue to give them the credibility they do not deserve and to make headlines of their forecasts.


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