Instead of learning from the review they seem determined to repeat it. Meanwhile Australians suffer from an economy with higher interest payments, higher unemployment and more people struggling.

Before they make their decision on interest rates on Tuesday, the Reserve Bank board should read the RBA review, particularly where it criticised them for not reducing interest rates from 2016 to 2019. Back then, inflation was outside the RBA’s target band of 2% to 3% but, unlike today, it was not too high but too low. Inflation was less than 2% for almost that entire period.

Given the high rates of inflation over the last two and half years you might think, what’s the problem with low inflation? Isn’t inflation bad?

While high inflation can cause problems, so does low inflation. Low inflation means the economy is stagnating. It is a sign that it is not growing as fast as it could and because of that unemployment is higher than it needs to be. The correct monetary policy response to inflation being below the target band is to cut interest rates and stimulate the economy.

But back in 2016, rather than cut, the RBA kept rates on hold for a record 30 consecutive meetings. The longest period in RBA history. The review was scathing, saying this was responsible for approximately 270,000 additional people being out of work for a year.

So why didn’t the RBA cut rates?

It’s because they keep getting the link between unemployment and inflation wrong.

Before the pandemic, the RBA thought that unemployment was too low. To simplify a whole lot of economic theory, the RBA believes if unemployment gets too low businesses won’t be able to find workers to fill their vacancies. Businesses will then have to poach them from other businesses by offering higher wages.

But if there is an economy-wide shortage of workers then it’s a zero-sum game. Businesses that lose workers to businesses paying higher wages will, in turn, bid up wages to fill their vacant positions. The result is rapidly rising wages. These higher wages eat into the profits of businesses, so businesses use their market power to put up their prices which causes inflation.

This is known as a wage price spiral. Simply put, the RBA believes low unemployment leads to higher inflation.

This theory is not always wrong, but it is dependent on unemployment being so low that workers are so hard to get that businesses offer higher wages. The RBA estimate of how low unemployment needed to be to set off a wage price spiral was very wrong then and it’s very wrong now.

While the RBA sat on its hands, refusing to change interest rates for almost three years from August 2016 to May 2019, wages stayed at historically low levels. They were stuck at about 2%. Not only did wages not rapidly increase, they languished at rates rarely seen.

The fact that wages were not increasing should have tipped them off that inflation was not going to rise. Instead of looking at what was actually happening they believed their economic models that were telling them a completely different story.

By about the middle of 2019, having waited almost three years, they finally realised their mistake and reluctantly cut interest rates.

Right now, the RBA is refusing to cut interest rates, in part because they are worried that unemployment is too low. Sound familiar?

But is unemployment too low?

Wages growth is heading down not up, having peaked at the end of last year. Inflation is falling as well. In fact, inflation is now in the RBA’s target band. But still the RBA waits. And all indications are that they will wait again at this week’s meeting. They will repeat the mistake the RBA review called them out on a year and a half ago.

Just like before the pandemic, the cost of this misjudgment is also high. People with a mortgage paying more than they have to. More people being unemployed.

Just like before the pandemic, the RBA is convinced that low unemployment will set off higher wages and inflation. Everyone makes mistakes but point of the review is to look at what went wrong and not repeat those mistakes.