RBA Deputy Governor’s ‘Beware False Prophets’ talk: Reactions w/ Michael Knox - EP250

Show host Gene Tunny and Morgans Chief Economist Michael Knox explore the recent insights Reserve Bank of Australia Deputy Governor Andrew Hauser shared on monetary policy at the 2024 Economic Society of Australia (QLD) business lunch. They examine the RBA's data-driven approach to interest rates,  the equilibrium real interest rate concept, and the impacts of Quantitative Tightening (QT). Michael is one of Australia’s leading market economists and RBA watchers, and he led the Q&A session with the Deputy Governor at the lunch. 

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What’s covered in EP250

• Introduction. (0:00)
• RBA's monetary policy decisions and the influence of high US debt on interest rates. (4:13)
• The equilibrium real interest rate. (10:29)
• Monetary policy, inflation, and interest rates. (14:16)
• Central bank balance sheet unwind and its potential impact on interest rates. (21:42)
• US budget deficits, bond yields, and quantitative tightening. (27:09)
• Chinese RMB's decline in international reserve currency status. (34:18)

Takeaways

1. RBA's Data-Driven Approach: The Reserve Bank of Australia relies on actual data more than forecasts when making interest rate decisions.
2. Criticism of Overconfidence: RBA Deputy Governor Andrew Hauser criticised the unwarranted confidence with which some commentators argue for monetary policy moves.
3. Implications of Quantitative Tightening (QT): The recent period of quantitative easing has complicated the relationship between government budget deficits and bond yields. However, there are concerns that as QT continues and deficits remain high, this relationship could reassert itself and lead to higher long-term interest rates than otherwise.

Links relevant to the conversation

RBA Deputy Governor Andrew Hauser’s Beware False Prophets speech:

https://www.rba.gov.au/speeches/2024/sp-dg-2024-08-12.html

Chris Joye’s article ‘Arrogant RBA boss should stop trying to muffle opponents’:

https://www.afr.com/policy/economy/arrogant-rba-boss-should-stop-trying-to-muffle-opponents-20240813-p5k25p

Kevin M Warsh: Financial market turmoil and the Federal Reserve – the plot thickens 

https://www.bis.org/review/r080415e.pdf

Full transcripts are available a few days after the episode is first published at www.economicsexplored.com.