Beware of economic ‘false prophets’, warns Reserve Bank

Commentators framing their economic projections as unquestionable and obvious should be treated with caution, says Reserve Bank of Australia’s deputy governor, Andrew Hauser.

In a speech to the Economic Society of Australia in Queensland, Mr Hauser took aim at overconfidence in the inherently uncertain and challenging task of predicting the future performance of an economy with many moving parts.

His remarks follow the central bank’s August board meeting, where interest rates were left on hold and Governor Michele Bullock pushed back on expectations of a near-term cut.

“Of course, eye-catching language sells newspapers, secures clients and draws crowds to the soapbox,” Mr Hauser said on Monday.

“But when the stakes are so high, claiming supreme confidence or certainty over what is an intrinsically uncertain and ambiguous outlook is a dangerous game.”

Such certainty risked “driving poor analysis and decision-making that could harm the welfare of all Australians”, he said.

“Beware anyone who claims it is obvious what to do – for they are false prophets.”

Views on the central bank’s inflation-fighting strategy remain mixed, with some experts of the view it should have hiked further to contain price pressures, while others warn the economy is soft and the risk of recession is high.

Central bankers were not immune to the human tendency of overconfidence, Mr Hauser clarified, stressing the challenges of economic forecasting was the importance to learn from errors.

To Illustrate his point, he dove into the question of unexpectedly persistent inflation.

The central bank’s latest thinking is the economy’s ability to supply goods and services was somewhat weaker, and hence the labour market was somewhat tighter, than previously thought.

“And that extra weakness is assumed to persist, pushing up a little on the outlook for inflation,” he said in the speech.

Yet those estimates of spare capacity could “easily be much higher, or much lower” with different scenarios – such as a sharper rise in unemployment – which could easily throw those projections off course.

A modest fall in employment growth and total hours worked as migration kept the supply of workers growing is how the central bank expects the labour market to unwind.

Yet a sharper rise in unemployment was possible, as in Canada, Sweden and New Zealand, for example.

“Concerns that something similar might be about to happen in the United States caused last week’s sharp repricing in US rate expectations,” Mr Hauser said in the speech.

In such a scenario, demand would be lower and inflationary pressure would ease faster.

 

Poppy Johnston
(Australian Associated Press)

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