Michele Bullock could be the Maradona of the RBA

Defenders come at him five times, but he fakes a move right then left, again and again, until eventually he scores.

It would later be dubbed the goal of the century. But to an observer with a bird’s eye view, Maradona runs almost half the field in virtually a straight line while the bamboozled opposing players appear to step out of his way.

In 2005, Mervyn King, at the time the governor of the Bank of England, used this story during a speech as an analogy of what a successful central banker ought to do. With a hawkish comment here and a dovish comment there, a steady policy rate can achieve the central bank’s objective without needing to move the cash rate at all.

Or so the argument goes. In central banking circles and among monetary policy wonks, it has become known as the Maradona theory.

So could Michele Bullock be Australia’s central banking equivalent of the Argentinian soccer legend?

The Reserve Bank of Australia has now had a steady cash rate for over a year, and we think it will remain on hold for at least another six months – with a risk it could be steady for even longer.

It has taken a different approach to many other central banks when confronting the challenge of high levels of inflation since the COVID-19 pandemic. The RBA was very cautious about not over-tightening.

Much of this reflected the bank’s strong desire to give a high weight to its mandate for full employment. Recall that, in addition to a surge in inflation, the end of the pandemic also saw the unemployment rate fall to a 50-year low of 3.5 per cent.

The RBA’s stated aim was to stay as close to full employment as possible while still getting inflation to fall. To do this, it lifted its policy rate by less than many other central banks.

Bullock, then the deputy governor, spoke in late 2022 about the notion that the RBA had the option of the “scorched earth” approach of pushing the economy into a downturn to get inflation down more quickly, but the board chose not to do this. The approach was somewhat experimental, and the central bank said that it saw only a “narrow pathway” to success.

Two and a half years on from the first hike, it seems clear the strategy has broadly worked. Inflation has come down, albeit not as fast as elsewhere, and is still only slowly drifting towards the RBA’s target. But the economy is also still close to, if not beyond, full employment.

While other central banks tightened more, and have brought inflation down faster, many economies have also had harder landings, including New Zealand, the UK, and many European nations.

In these countries, the fall in inflation and much weakened economic growth forced central banks to cut interest rates this year, after having hiked more than the RBA did. In some places, policy rates are still higher in these places than in Australia, even after reductions. The RBA has held steady and cruised through the middle.

Since late 2023, we have held the view that the RBA would not cut in 2024. And we see an increasing risk that the central bank could miss the easing phase altogether. We see a 25 per cent chance that Australia will not cut at all in 2025.

If this risk comes to pass and the RBA does not get to reduce the cash rate, will the central bank and governor Bullock be given credit for taking this approach? We shall see.

Some observers will be disappointed that it is taking so long for interest rate cuts to arrive. Others may note that inflation has been well above the RBA’s target for a long time and question if the central bank is achieving its mandate.

But the trade-off is that the unemployment rate remains low.

The key difficulty with hoping for popular support for the strategy is that unemployment typically only affects a small proportion of the population, while elevated inflation and high price levels affect pretty much everyone.

Thankfully, the RBA does not need to be popular – it is independent from the political cycle. But before complaining that interest rates have not come down yet, or maybe won’t at all, give some thought to the fact that the unemployment rate is still around its lowest level in half a century, currently at 4.1 per cent.

And while inflation is still a bit too high at 3.5 per cent on the core measure and gradually falling, it is hardly concerningly excessive.

Bullock is unlikely to claim or receive the widespread adulation that Maradona enjoyed. But in monetary policy circles, the RBA’s recent approach may yet be used to illustrate the so-called Maradona theory. Time will tell.