My previous blog post on the RBA noted their tendency to follow a Taylor Rule prior to the GFC. A colleague points out another statistical regularity that holds either side of the GFC, and right back to 1990: the RBA’s decisions follow the 90-day bank bill. Below are Phil Williams’ observations on this issue.
In the days running up to the first Tuesday of each month, the Australian populace is subjected to the excruciating pageantry of whether the RBA Board will increase or decrease interest rates, or whether they will keep them on hold for another month.
Economists take a break from their routine of poring over mountains of statistics and econometric models to come forth and give their solemn prognostications to an adoring public. Financial commentators spring to life like wildlife awakening from the first rains of the wet season, waiting with bated breath on what those extraordinary men and women of the RBA Board might decide.
And then the press statement is released, trading floors spring to life and newspapers splash forth on what it may mean to the lives of the heavily indebted peasantry. This monthly charade also gives politicians an opportunity to spruik their wares. And then we wait for the process to start again next month.
As a humanitarian, I would like to save us from this dreadful spectacle and give each of us the opportunity to track what the RBA might, or might not do in real time. In so doing I hope to de-mystify the process, by stating that the RBA doesn’t lead the way in setting rates, the market does. The RBA is a follower, not a leader.
The following graph plots the 90-day bank-accepted bill rate (red line) and the RBA target cash rate (black line) from January 1990 to 28 July 2011. The blue line at the bottom shows the percentage difference between the two rates. The data is sourced from the RBA’s own web-site, Table F1, “Daily Interest Rates and Yields – Money Market”.
The graph shows an almost 100% correlation between the cash rate and the 90-day bank bill rates. However the data also shows that in almost every instance the RBA cash rate FOLLOWS the 90-day bank bill rate, rather than leads it. The data also shows that the RBA will generally increase rates once the 90-day bank bill rate gets 50 basis points or more above the RBA cash rate. The actions on the downside are not as tight, with decreases in cash rates occurring when the bank bill rate is anywhere from 0 to 100 basis points below the 90-day bank bill rate. However as a rule of thumb the RBA tends to decrease the cash rate when the 90-day bank bill rate is 50+ basis points lower than the cash rate.
This analysis raises a number of interesting questions:
Why do we have the RBA as an interest-rate setting body at all when all they do is follow the market?
Why does the RBA shroud itself in such mysticism when their actions are so transparent to all?
What is the quality of our economists, politicians and financial commentators that we have to go through the “Will They or Won’t They” pantomime each month?
How could any economist get their forecasts wrong, particularly on the up-side?
I can only say one thing in defence of the RBA. They are not as destructive as the Bank of England, the ECB or the activist US Federal Reserve.