When a highly respected former central banker gives you some insights into what’s going on in the world it pays to listen. In this white paper, former Reserve Bank Governor Glenn Stevens’s mix of history and pragmatism reflects a readiness to admit there is no single answer to one of the most challenging economic questions we face: what happens to interest rates and inflation – a frankness that was all but impossible when he actually helped control policy.
Stevens headed up the RBA for 10 years and only finished up 12 months ago, having earned praise and respect for how he navigated the GFC and helped maintain our unbroken record of GDP growth.
While he doesn’t exactly fire from the lip in his new role as a consultant to Ellerston Capital, he is clearly at liberty to say things he couldn’t in the past, when, like all central bankers, he was pretty much obliged to give the impression he knew exactly what was going on and everything was under control.
The fact is, despite having access to the best economic data available, central bankers get their forecasts wrong too. Just look at the US Fed’s ‘dot plot’, where each of the governors would forecast where they thought interest rates would be over time. In June 2014, when US cash rates were 0.25%, the forecast range was from 0.5-4.25% by mid-2016. They turned out to be 0.5%!
The whitepaper asks whether the record low real interest rates (adjusted for inflation) the whole world is experiencing are attributable to the unprecedented easing activities of the central banks since the GFC or some other ‘natural’ cause, like changes in demographics.
Refreshingly, he doesn’t try to portray that he knows the answers, in fact, he kind of goes out of his way to get the message across that it’s anyone’s guess: “Maybe rates are low just because they are, and will be until they are not.”
However, he also argues that working out what is driving low rates, and in particular, low inflation, will be very important as the world recovers, because if the central bankers make the wrong guess, the momentum behind any recovery could be snuffed out.