The RBA board stood around the prone horse on Tuesday morning in the Martin Place stables, stroking their chins, wondering what to do with it.

The Governor gave its rump a nudge with his brogue and, getting no response, delivered a sterner kick to the same effect.

The Deputy Governor grabbed a hoof, established that the fetlock was flexible and remarked that at least it wasn’t stiff – yet.

Eventually the Treasury secretary, making use of his nursing experience, poked a finger in the equine’s unblinking eye which remained unblinking.

“Yeah, it’s dead, but,” he said, which provoked more chin stroking.

“But that doesn’t mean we can’t flog it some more next month!” declared the Governor. And with consensus happily reached, they adjourned for lunch.

What was said

Of course the official statement didn’t mention the horse by name (Economy, by Monetary Mayhem out of Fiscal Folly), but he was there between the lines, specifically:

“The combination of higher interest rates and cost-of-living pressures is leading to a substantial slowing in household spending. While housing prices are rising again and some households have substantial savings buffers, others are experiencing a painful squeeze on their finances. There are also uncertainties regarding the global economy, which is expected to grow at a below-average rate over the next couple of years.”

And thus the RBA paused its flogging, officially to provide “the board with more time to assess the state of the economy and the economic outlook and associated risks”, unofficially to see if economy starts stinking and what other central banks are doing with their horses.

Central bankers are like that, forever looking over their shoulders and stalls to see what the others are doing, not wanting to stray too far from the orthodoxy of the day, particularly when the US Federal Reserve wields a much more influential whip.

That is a worry for Australia given the chatter about their determination to “cross the last mile” in cutting inflation, especially for the banks that have the more stringent target of 2 per cent rather than the RBA’s 2-3 per cent.

It is not enough that inflation is coming down in its lagged response to interest rate rises; the central bankers want it right down and staying down before they show mercy.

Clean break

It would be nice to think the RBA has discovered the Window Cleaners Index (WCI™) and allowed a vet to at least provide some pain relief with the horse in an induced coma, but pausing the flogging is all that’s on offer until rigor mortis is confirmed.

The question increasingly asked in various quarters at this stage is whether the central bankers actually know what they are doing in trying to imitate Paul Volcker’s ruthless 1979 medicine.

I keep coming back to Philip Lowe’s best speech as Governor when he explained back in November that interest rates wouldn’t work as well as they used to in dealing with inflation given the different factors driving it. But that knowledge did not stop him flogging the horse.

European Central Bank executive board member Isabel Schnabel gave a somewhat similar speech in June, spelling out why the ECB really did not know what the outlook for inflation was and how dead horse flogging (alias increasing interest rates in the face of things not influenced by higher interest rates) didn’t work.

As one example, Professor Schnabel cited the weather and climate change: “El Niño is a case in point. The US Climate Prediction Centre has recently declared that El Niño conditions are now officially present and are expected to gradually strengthen in the northern hemisphere in the winter of 2023-24.

“ECB analysis suggests that a one-degree temperature increase during El Niño historically raised global food prices by more than 6 per cent after one year.

“El Niño also reinforces the risks of extreme weather events stemming from global warming. Sea surface temperatures in the North Atlantic are currently significantly above their average over the past 40 years.”

Damage control

You can flog the horse with iron bars and it won’t stop droughts, floods and bushfires. I suppose if central banks so damaged the economy that millions of people couldn’t afford to eat, that would ameliorate the price impact of smaller crops, but I’m loath to suggest it in case such a policy is adopted. Besides, starving people to death would only worsen the labour shortage.

Yet the professor, like Governor Lowe, still comes down on the side of wielding the blunt instrument as good enough, confessing the ECB did not know what it was doing.

British historian Adam Tooze was scathing in his Chartbook newsletter, titled Acting out of ignorance: The new logic of central bank inflation fighting.

“Her characteristically lucid assessment of the limits of central bank knowledge when faced with the problem of stubborn inflation, smacks less of heroism or technocracy than nihilism,” he wrote. “And yet this does not lead Schnabel to put in question the central bank and its instrument as a means of inflation control, or even their ability to specify ‘optimal policy’.

“It leads her, instead, to double down. In Schnabel’s logic, admitted ignorance, failures of foresight and profound uncertainty become an argument for forceful counter-inflationary action.”

In a further Financial Times article, Professor Tooze warned the UK was in danger of repeating the austerity mistake it made in the 2010s with disastrous results, this time via monetary policy rather than fiscal policy.

He dared suggest the heresy of abandoning the Bank of England’s 2 per cent inflation target. That, which was a good idea three decades ago ahead of the “Great Moderation”, might not now be the best policy for a changed world.

That same broader thinking might yet be required of the RBA and Albanese government.

Unfortunately, one of the dud Reserve Bank review recommendations adopted by Treasurer Chalmers was to actually tighten the bank’s inflation target a little, wanting the bank to act faster against inflation, increasing pressure to keep flogging the horse.

It is a relief that the RBA paused this month, but the risk of it doing more damage in a time of uncertainty and inevitable ignorance remains.

I fear they won’t put the whip away until the horse has passed through the knackery. Even then, there’s a strong chance inflation will be above the target.