The Reserve Bank continues to ignore market signals and runs the risk of once again leaving the brakes on for too long while being caught in the headlights of uncertainty, Michael Pascoe argues.
Inflation is printing within the target range, growth, both local and global, is expected to weaken, and the labour market’s perceived “tightness” is clearly not inflationary – yet the Reserve Bank of Australia is frozen, unable to make a decision other than to not make a decision.
We’ve hit a dud patch in monetary policy when the money market reckons there is next to no chance the RBA will trim rates at its meeting next week. If the RBA isn’t considering a further cut, what is it doing?
The answer is: dithering.
Despite the data, despite what has already happened to inflation, despite admitting there’s a nine-month delay between the bank lifting its foot a little off the brake and the economy gaining speed, the bank is caught in the headlights by Martin Place’s favourite word: “uncertainty”.
The certainty of uncertainty
Of course, there is “uncertainty”.
If there was “certainty” about the need to move rates, it would confirm that the bank had been too late to move.
The “uncertainty” about inflation rising meant the bank was too slow in lifting rates in 2022 – it waited until it was certain inflation was a problem and thus made it a bigger problem.
The “uncertainty” about the economy’s softness and contained inflationary pressures mean the bank is too slow now in easing rates somewhat closer to neutral and thus will make the economy weaker and unemployment higher.
The “uncertainty” about global trade and growth created by the Trump mobsters strengthens the case for getting ahead of the game instead of playing catch-up. Shallow local commentary suggesting tariffs lifting American inflation means we also need restrictive rates is simply bizarre.
The peanut gallery has trouble realising we are not part of the American economy, unable to move on from last century’s cliché of “if America sneezes, Australia catches a cold”. Happily, we are more part of Asia’s economy. In the GFC, America caught double pneumonia, and we only sneezed.
If the Trumpsters succeed in their punitive tariff folly, the impact on us is most likely to be deflationary as international trade turns away from the US in search of more reliable partners. A weaker economy with disinflationary pressures is a recipe for rate cuts before it comes to pass, not afterwards.
Since the February board meeting, the RBA Governor, Deputy Governor, and head of economics have all had a crack at explaining “uncertainty”, collectively leaving all but the doctrinaire hawks scratching their heads about why the money market should be convinced there will be no movement next month.
Politics over economically sound decisions
RBA and market perceptions are damaged by the national commentariat more interested in domestic political points than the overall economy. Repeating LNP talking points about “Labor spending causing inflation and requiring tight monetary policy” seems to be self-fulfilling with interest rates, such is the desire of the RBA to be at one with money market expectations.
Deputy Governor Andrew Hauser went closest to making the case for further easing rates when he unveiled ($) what the AFR called a “secret chart” showing inflation was in danger of falling below target. Yet the AFR persists with the line that there is “no realistic prospect of another cut in interest rates before the May election”. Why not?
The danger here is that the RBA lives in fear of being tarred with a political brush.
If it did cut rates next week, the usual suspects will claim it was pressured into doing Labor a favour. But pre-emptively ruling out a cut, which is the money market and commentariat’s understanding, means the bank has indeed compromised its integrity and mandate.
After the February meeting, Governor Bullock’s outlook was summarised by her declaring the bank just didn’t know. Of course, it never can know for sure but needs to make a judgement.
RBA chief economist Sarah Hunter last week went long on the “uncertainty” vibe despite spelling out the need for the bank to have a “forward-looking approach” to setting rates. This raises the question of which rear vision mirror the bank is concentrating on to obtain its forward view.
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That pesky “trimmed mean”
The dreaded “trimmed-mean” is all the rage in RBA land, despite the bank’s actual mandate stipulating the common-or-garden variety of Consumer Price Index.
As I’ve written here before, there seems to be a crazy idea that the trimmed mean somehow predicts the future instead of merely being another measure of the past. It lagged the CPI in picking up that inflation was picking up, a factor in the RBA being late to lift rates.
You would think anyone trying to be “forward-looking” would be most interested in the most up-to-date data, not the quarterly measures, the midpoint of which is months old when published.
The ABS monthly inflation series is proving to be a better guide to turning points that the trimmed mean. No measure is guaranteed to always be closest to the pin with the benefit of hindsight,
but it’s in delivering the vibe of the present that data should be prioritised.
Instead, the RBA gives the impression of ignoring the monthly figures – the figures that had been pointing to the need to cut ahead of the quarterly history.
The latest monthly release was on February 26 for January. It showed the CPI smack on the RBA’s new adopted target of 2.5 per cent and the annual trimmed mean at 2.8 per cent, within the actual mandated range of 2 to 3 per cent. It had been 2.7 per cent the month before.
The next, for February, will be published on Wednesday, nice and fresh for the RBA board meeting next Monday and Tuesday. Another low number around the target would have a responsible board very actively considering an immediate rate cut – unless it was made up of hopeless ditherers, caught in the commentary headlights.
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Michael Pascoe is an independent journalist and commentator with five decades of experience here and abroad in print, broadcast and online journalism. His book, The Summertime of Our Dreams, is published by Ultimo Press.