While most of the nation was concentrating on a horse race, the Reserve Bank trotted out a surprise by not surprising and kept rates steady. Michael Pascoe was there.
Forget the usual talk of doves and hawks fighting for supremacy in the RBA aviary; the Emperor Penguins are back in charge.
Doves want to lower rates, hawks push them higher, but the penguins* famously sit pat through the long dark Antarctic winter, keeping their eggs warm.
And sitting pat is what central bankers like doing most. Stable rates at a reasonable level are seen as confirmation that the bank has and is doing a masterful job of keeping the economy on a steady keel.
There was zero surprise in the RBA keeping its cash rate steady at its Melbourne Cup meeting after the jump in September quarter inflation.
There was a surprise, though, in how relatively calmly the bank took the leap in trimmed mean inflation. Governor Michele Bullock had warned prior to the CPI announcement that a trimmed mean rise of 0.9 per cent would be a “material miss”. The actual rise of a full 1 per cent then was enough to have some of the pet shop galahs turning full hawk, suggesting the next rate move had to be up.
But that wasn’t the tone of the briefing by Assistant Governor Sarah Hunter in the media lockup for the quarter statement on monetary policy, or the detail in the SoMP, or Governor Bullock’s media conference and the board’s official statement.
Instead of turning raptor, the RBA’s feathers were remarkably unruffled.
Dr Hunter and Ms Bullock stressed that the September quarter’s 1% would remain as a hump in inflation counting for the next year. The trimmed mean forecast for this calendar and financial year was boosted to 3.2 per cent, outside the RBA’s official remit of 2-to-3 per cent and well above its target of 2.5 per cent.
But within the market assumption of just one more cash rate trimming next year, the bank forecasts the trimmed mean to happily settle back to about 2.6 per cent once this September quarter’s score washes out in a year’s time.
The bank is betting September was more of a one-off than a warning of inflation taking off and thus requiring a tightening of the thumbscrews. As the official statement put it:
The Board’s judgement is that some of the increase in underlying inflation in the September quarter was due to temporary factors.
The specific temporary suspects were international travel, council rates and fuel.
Excess demand
Dr Hunter suggested there was not too much excess demand to be squeezed out. The board, as usual, declared the outlook uncertain (when isn’t it?) while the Statement of Monetary Policy (SoMP) went a little further with “highly uncertain” for a couple of key assessments.
With that outlook, the penguins are in charge, trying to see through the darkness of unending night and blizzards, sitting pat unless and until conditions change.
In trying to divine the mix of underlying and temporary factors in September inflation and thus its inflation forecast, new housing costs were a key in the jump and is in the continuing basket.
“The forecasts for new dwelling inflation for both detached houses and apartments, which makes up 7 per cent of the CPI – has been revised higher, reflecting the signal from the stronger-than-expected September quarter data, as well as upward revisions to the outlook for housing prices and dwelling investment,” states the SoMP.
“CPI rent inflation, which reflects the rents currently being paid and also has a weight of 7 per cent, is also expected to be a little higher over the forecast period.”
And, yes, the government’s open-ended 5% deposit policy for first home buyers is a factor in increasing demand, and, yes, lower interest rates increase demand and prices, too. Lower interest rates particularly stir investors’ wallets.
Welcome again to a self-reinforcing policy cycle contributing to our housing crisis, but it’s not the RBA’s official job to target housing prices per se.
It is the government’s job to lessen this long-coming crisis.
Adding extra spending fuel for first home buyers at the same time lower interest rates are stimulating investor action works out to be a dumb combination when developers can increase prices and tradies are not plentiful.
So what should have or could be done? Macroprudential controls – specific controls on bank lending, such as limiting investor borrowing – have been used before with the effect of hosing down investor fervour, but on the excuse of protecting financial stability.
Asked if a dose of macro would make her job easier, Governor Bullock stuck to the line of macroprudential being a tool when there’s a risk to financial stability, a matter for APRA.
So we remain stuck with the RBA’s single blunt tool of interest rates, with all their collateral damage to tame animal spirits.
That’s the given bad news. Tuesday’s good news was the penguin stance, the lack of hawkish threat.
Specifically in the presser, the governor said the board was “confident inflation is going to come down” and that,
we’re at the right spot we need to be the moment.
She had no easing or tightening bias.
Ms Bullock refrained from saying “I don’t like to say I told you so” when, in her opening remarks, she effectively told us so that the bank’s pause in cutting rates had proven prudent. I think she liked saying it.
Je ne regrette rien. RBA’s Michele Bullock says pfft to rates critics
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.