If you believe the markets, there won’t be an interest rate cut after this week’s Reserve Bank meeting.

You’re likely to hear a bunch of reasons but missing from them is the most important one: The RBA has no confidence in what inflation is going to do and it is continually worried that it is about to shoot up.

In the past, the RBA has been confident in its inflation predictions. It needed to be.

The impact of interest rates on the economy takes time and you need to set them for where you think inflation is going to be in six to 12 months, not where they have been in the past.

But in the past decade, the central bank has made some spectacular mistakes about movements in inflation. The biggest was former Governor Philip Lowe saying interest rates wouldn’t rise until at least 2024.

He then had to rapidly increase them in 2022.

To be fair to Lowe, he did have some caveats on that prediction. But the public, including the media, largely took it as a promise.

The RBA was also caught out before the pandemic, keeping interest rates too high because it thought inflation was about to increase. It never did and the subsequent Reserve Bank review criticised it for that inaction.

Both of these episodes highlight that the RBA has misunderstood the main drivers of inflation.

This seems to have shaken it, and instead of looking forward with confidence, it is looking behind in fear.

The RBA has cut interest rates three times this year and each time it has come in the board meeting after the Australian Bureau of Statistics has released its quarterly read on inflation. It seems that each time it cuts rates, it needs to be reassured about where inflation is.

This means that interest rates are being set for where the economy was four months ago and not where it will be in the next year.

Each time the board has got its forecast wrong, it has been because it has misjudged how unemployment impacts inflation.

Recently it has been overly concerned that unemployment is too low. It wrongly believes that businesses face a shortage of workers that will lead to rapidly rising wages, which in turn flow into higher prices and higher inflation.

Despite this, inflation has steadily fallen.

With the ABS not releasing its next quarterly inflation figures until the end of October, we are unlikely to see the RBA act until its November meeting.

The ABS did release monthly inflation figures last week, but these are far less reliable than the quarterly numbers. The bank has consistently said the monthly figures have little impact on its interest rate decisions.

For the 12 months to August, inflation increased to 3 per cent, but at the same time prices in August fell 0.1 per cent. The RBA’s preferred measure, the underlying rate was 2.6 per cent. This is almost exactly in the middle of its inflation target band of 2-3 per cent.

The Reserve’s inability to understand the drivers of inflation spells ongoing problems for Australia. By always looking backwards, it is reducing the effectiveness of monetary policy.

But it also means that unemployment is higher than if it better understood what was happening.

The RBA has spent the past few years worrying that not enough people are unemployed. It has raised interest rates and kept them high in an attempt to reduce employment and get the unemployment rate higher.

Given this, it would probably surprise many that the RBA has a dual mandate of price stability and full employment. Both these objectives are supposed to be equal.

But while parents shouldn’t have a favourite child, when it comes to the dual mandate the RBA certainly appears to favour keeping inflation low. Full employment seems to come in a distant second.

Unemployment reached a low of 3.5 per cent in the middle of 2023, but higher interest rates have helped push it up to 4.2 per cent. That means an extra 113,000 people are unemployed.

The RBA’s failures have real consequences. It should go back and closely reread the recommendations of the RBA review, particularly the ones that encourage it to open up to new and diverse viewpoints.

Otherwise, it is doomed to repeat the mistakes of the past. Without the reassurance of the quarterly inflation figures, don’t expect an interest rate cut at this week’s meeting.

This article was originally published in The New Daily.