Governor of the Reserve Bank of Australia, Glenn Stevens.

Scrutiny ... RBA boss Glenn Stevens. Photo: Michel O'Sullivan

The Reserve Bank was the toast of the financial world a decade ago. Australia had notched up its 11th year of economic growth in a row after dodging the 2001 ''tech wreck'' recession, and the international plaudits were flowing in.

In September 2002, the governor Ian Macfarlane was crowned central banker of the year by Euromoney magazine. It credited the economy's performance to his foresight, and luck.

A few years later, Macfarlane was mentioned in media reports as a potential replacement for the US central banker Alan Greenspan.

Fast forward to today and it's a very different story.

The RBA governor, Glenn Stevens, who took over from Macfarlane in 2006, has earned widespread praise from economists for his decisive response to the global financial crisis and the mining boom since then.

But after this week's shock news that headline inflation was just 0.1 per cent in the March quarter, economists have joined some business leaders in openly criticising the central bank board's reluctance to cut interest rates.

''I think at the end of the day they've got it wrong,'' the AMP Capital chief economist, Shane Oliver, says. ''They were right in the way they were saying that the risks of Europe had receded, but they were wrong in missing the weakness in the domestic economy.''

Solomon Lew, a retail magnate and former RBA board member, claimed last month the bank was out of touch, and this was seriously hurting the biggest private sector employer, retail.

''I have a view that they are not in touch with the market and don't understand where the economy is at the moment, there is a big danger in the amount of jobs being lost and that has put a dampener on the economy,'' Lew said.

The housing and manufacturing industries have been just as strident - the prominent unionist Paul Howes has called for a debate on the RBA's charter.

Criticism for not cutting interest rates is inevitable from sectional interests, of course. But even some former Reserve insiders now acknowledge the bank appears to have overestimated the threat posed by inflation.

Professor Bob Gregory, an RBA board member between 1985 and 1995 and an economist at the Australian National University, says it now seems clear the boom has not spread through the economy as much as the Reserve expected.

''In retrospect, I think the bank probably forecast a bigger boom than we've got,'' Gregory says.

He stresses that the RBA cannot "flip its policy around one month to the next," and no one is perfect, but also adds: ''Having said all that, it's quite clear that interest rates have to come down because it does look as though the inflation forecasts are out of kilter.''

Raising more questions about the RBA's ability to set lending rates, the big four banks have made it clear they now intend to set mortgage rates independent of the central bank.

So has the Reserve lost its mojo?

Among experts contacted by Weekend Business, there are concerns the Reserve has made two main mistakes: it overestimated the effect of the mining boom while underestimating the weakness of consumers. Others disagree, saying the bank has been right to sit on the sidelines.

Whatever their view on the Reserve's performance, most agree it will cut interest rates on Tuesday. This should give the economy a much-needed kick. Nevertheless, the fierce debate over interest rates raises some questions about one of the most powerful institutions in the country.

Stevens's salary of more than $1 million a year makes him the highest-paid public servant in Australia and one of the best-paid central bankers in the world - but has the Reserve fundamentally misread the economy?

And has its hard-earned reputation - already tarnished by the Securency bribery scandal - been affected by its reluctance to cut rates this year?

Dick Warburton, an RBA board member between 1992 and 2002, says the fierce scrutiny of the Reserve board is nothing new.

Warburton was chairman of David Jones at the time, and experienced retail industry pressure for rate cuts first hand after the Asian financial crisis of 1997.

''People said 'look we're in diabolical trouble, we really should lower interest rates' and the bank decided to hold firm because they realised that was the right decision at the time because of inflationary matters. Time proved that was the right decision,'' Warburton recalls.

This tough approach to the economy's slow lanes has clearly been kept alive by the RBA. But in doing so, has it ignored warning signs that the economy was losing steam?

Despite the retail industry shedding 28,000 jobs in the previous year, the deputy governor, Philip Lowe, in February argued there was a clear chain linking the mining boom to Sydney and Melbourne.

''This chain can be hard to see,'' Lowe said. ''But it is real, and it is one of the factors that have had a material effect on the Australian economy over recent years.''

Yet in recent months, a growing chorus of private sector economists has argued these "spillover effects" have not been nearly as strong as the Reserve believes.

Stevens tacitly acknowledged the weakness when he kept interest rates on hold this month, saying the board judged ''the pace of output growth to be somewhat lower than earlier estimated'', but it wanted to see more details on inflation before cutting rates.

We now know the annual rate of ''underlying'' inflation was at its lowest in 13 years.

So why did the Reserve's view on the economy fail to match reality?

One of the first banks to predict the weakness of the previous year was Westpac, which boldly forecast 1 percentage point of future rate cuts last July.

After cuts in November and December and more expected in the coming months, Westpac's call may well be on the money.

A senior economist at the bank, Justin Smirk, says a crucial misstep by the Reserve has been its analysis of debt-laden households.

In the two decades before the crash of 2008, households were increasing their spending faster than their incomes grew. This abruptly stopped during the global financial crisis, and households now save about 10 per cent of their incomes.

Smirk says the Reserve appeared worried spending growth would take off again - but in the new era of debt-conscious consumers, it simply has not happened.

''In the last 20 years, we had the household savings rate going down, people were basically leveraging more and more. Now we've got the reverse, household savings rates have gone up, we don't think they'll go any higher, but they're not going to fall again either. So it's a real shift in the way the Australian economy behaves,'' he says.

Economists say the other big development the bank may have overestimated is the size of the mining boom.

Gregory says the scale of the investment boom occurring in resources is near unprecedented, which makes forecasting its impact extremely difficult.

Figures on the amount of investment on the table are staggering. Deloitte Access Economics says there are $415.4 billion worth of big projects under construction or set to go ahead soon - a 43 per cent increase on a year ago.

But Gregory says this enormous investment pipeline has not ignited the domestic economy as expected. ''What's happened is the boom hasn't occurred. It's not as though we've got in my view a major slump, we just have not yet got this boom that we're allegedly supposed to be having.''

Figures from the Bureau of Statistics suggest the boom will accelerate over the coming year, with mining investment set to rise another 30 per cent in 2012-13, hitting $120 billion.

So far, however, much of the spending appears to have gone on imports of capital goods. The boom has failed to generate the number of jobs expected, with unemployment edging up over last year.

Inflation, another expected by-product of the boom, has also been much lower than the bank estimated.

The latest RBA forecasts in February said inflation would dip to 1.75 per cent and rise back to 3 per cent by the end of the year. But with the less volatile ''underlying'' measure of inflation registering just 0.3 per cent in the March quarter, economists now expect these figures to be revised down next week.

This is partly a result of the strong dollar, which has sharply lowered the cost of imported goods. The RBA, and most economists, expect this effect will gradually fade, now that the dollar is no longer rising.

All up, Stevens's big challenge has been to predict the future at a time when the ''two-speed'' economy is in full swing.

In defence of the Reserve, Gregory explains that the full effects of interest rate changes can take up to two years to be visible. This means central banks are hesitant about making sudden changes in such an uncertain environment.

''You've got to expect an institution looking two years ahead to be slightly behind the game, if they're not slightly behind the game, they're going to be flipping up and down too much,'' Gregory says.

Paul Bloxham, a former RBA economist who now works for HSBC, also points out that the Reserve's job is to keep inflation between 2 per cent and 3 per cent - and the trimmed mean measure is now at 2.2 per cent.

''Overall I don't think the RBA has waited too long,'' Bloxham says.

However, he concedes that the system of quarterly inflation figures makes it harder for the bank to react quickly. ''It would be helpful if maybe they had a few more tools to look at. New Zealand and Australia are the only two OECD countries that don't have a monthly CPI.''

If the market pundits are right, the Reserve will act to relieve some of these economic pressures when it meets on the 11th floor boardroom in Martin Place on Tuesday. Futures markets are pricing in a 0.25 percentage point cut, but some analysts predict a bigger reduction.

For those in the economy's slow lanes, it cannot come soon enough. Undoubtedly, many will demand the Reserve goes further.

The national secretary of the Australian Workers' Union, Paul Howes, has already suggested the bank takes a more active approach to the currency - something the government has ruled out.

''The RBA has made the wrong call consistently and compounded those bad calls,'' Howes said on ABC Radio earlier this month.

''And for some bizarre reason in this country, it seems like it's religious heresy to criticise the decisions of the RBA.''

The chief executive of the Australian Chamber of Commerce and Industry, Peter Anderson, has demanded a 0.50 percentage point cut, saying 0.25 percentage points will not be enough.

''I do believe that their judgment in the first half of this year has been too timid, and that there's been an underestimate of the weakness in the slow lanes of the economy,'' Anderson says.

But when it comes to the Reserve's reputation, blatant critics such as Howes are rare.

Anderson, for instance, is quick to reject suggestions the RBA's international reputation has suffered in recent months.

''I don't think there's reputational damage to the RBA. I think the Reserve Bank maintains a very credible reputation as one of Australia's best economic institutions,'' he says.

And for all of the hand-wringing about interest rates, most economists, even those who disagree with Stevens, say the Reserve remains one of the top central banks in the world.

AMP's Oliver, for instance, says recent decisions on rates have ''probably'' dented its reputation slightly, ''but they can recover from it''.

''They've only been wrong for the past three months," he says.

Despite furious public scrutiny of month-to-month rate moves, most experts say the Reserve's success should be judged over a much bigger time frame.

Warburton, who describes Howes's statements as ''almost silly'', says holding off on rate cuts for a few months makes little overall difference to the economy.

''I don't say they got it right or wrong. They'll make the decision next week and based on the current data the evidence is they'll possibly go down. But it doesn't make a difference whether they go down next week or whether they go down a month ago,'' he says.

He is also quick to point out that the most vocal critics of the Reserve often have a vested interest in lower rates.

''Most people who judge the Reserve has got it wrong are those who would like interest rates to come down a bit quicker, but there are others who would be quite happy to see interest rates go up a little bit.''

Bank chiefs, under fire for their own reluctance to pass on any cuts from the Reserve, are also quick to defend Stevens and the Reserve's board.

The National Bank of Australia chief executive, Cameron Clyne, recently said people criticising the Reserve need to remember they do not have all the economic data at their fingertips.

The Commonwealth Bank chief, Ian Narev, gave this veiled defence of Stevens earlier this month.

''I have a very high regard for Glenn Stevens. I'm always a bit bemused by the fact that people should do 'x' and should do 'y','' Narev said.

''I think we've got an unequally capable individual and board with access to data most of us don't see, making a very difficult trade-off.''

If the projections for the huge amounts of mining investment are to believed, the trade-off Narev speaks of is likely to remain ''very difficult'' for a while yet.

Gerard Minack, a global strategist at Morgan Stanley, says this increasingly lopsided economy is the basic predicament that faces the Reserve.

''They have one tool to manage an economy that's increasingly disparate. Time will tell whether policy has been too tight over the last few quarters, it's too early to make that call,'' he says.

To make matters more difficult, Europe continues to hover on the brink of a crisis, and China's economy could be slowing.

As economists like to say, it's an environment of ''heightened uncertainty''.

But this tends to be forgotten in the furious debate about interest rates.

''If they were perfect, they wouldn't be running a central bank, they would be running a hedge fund and making millions of bucks a year,'' Minack says.