The Big Four banks are betting the Australian Bureau of Statistics on Wednesday will deliver the verdict that the RBA has been wrong on interest rates. Not that they’d dare phrase it that way, says Michael Pascoe.
It’s a brave soul who bets on what ABS statistics might be, but that’s what the money market in general and our big banks in particular do. They are making a big bet that this Wednesday’s CPI numbers will show the RBA has got monetary policy wrong, that rates should have been cut in November, if not considerably earlier.
Three of the Big Four reckon the much-ballyhooed “trimmed mean” inflation measure will come in at 0.5% for the quarter. The fourth bank (Westpac) is only a bee’s appendage higher by rounding up to 0.6.
Averaging the four, the alleged underlying inflation measure over the past half year is expected to annualise at 2.5%, right smack in the middle of the target the RBA seems to have adopted since swallowing the dubious Treasury review of its operations.
As for the “headline” CPI, the thing our central bank is actually mandated to target but ignores, three of the four tip it to be up 0.2% for the second consecutive quarter, making 2.4% over the past year and just 1.6% annualising the last six months.
So why didn’t the RBA trim rates in November? Because it does not have a good handle on what the economy is doing, relying instead on dud modelling, just as it has no idea of what the NAIRU (non-inflation-accelerating rate of unemployment) might be.
Poor inflation forecasts?
While deciding to keep the monetary screws turned at its December 10 meeting, the RBA board was sticking with its forecast of trimmed mean inflation for 2024 being 3.4 per cent and not hitting its 2.5 per cent nirvana for another two years.
Of course, all the commercial banks’ highly-paid forecasters could yet be proven wrong on Wednesday, with the RBA the only one marching in step, but I suspect the Martin Place mandarins are feeling a little nervous about the figures.
As the CBA economics team put it:
The December quarter CPI report will make or break the case for the RBA Board to reduce the cash rate at their next meeting.
The CBA is our biggest bank and therefore, through its customers, the mob that should have the best feel for what is happening. The economics team highlighted that there have been growing signs that the disinflationary pulse firmed over the past two months.
“For one, both the October and November CPI reports contained strong price signals confirming this trend,” the bank reported. “And price signals from various timely consumer and business surveys also corroborate this trend.”
RBA relies on modelling
The RBA board had both of those ABS monthly CPI figures to consider at their meeting last month but stuck firm with their modelling.
Should the December quarter trimmed mean print at 0.5 or 0.6, the opportunity is there for the Governor to spin it as our mighty central bank’s great victory over inflation, proving that keeping rates where they were set in November 2023 was exactly the right medicine Australia needed and here’s a 0.25% rate cut to reward all those have been suffering for doing such a good job of suffering.
That’s much more palatable than putting it the way the CBA did when making its annualised trimmed mean forecast:
“That is to say, underlying inflation over the second half of 2024 tracked at the midpoint of the RBA’s inflation target.”
It should be very embarrassing for the RBA not to have noticed that, not to know where inflation was.
In such circumstances, any credibility about its forecasting of inflation in a year or two’s time is shot.
Remember that while the cash rate was held steady, monetary policy was still tightening over those six months when the CBA thinks the trimmed mean was on target. According to the RBA itself, all the effect of the November 2023 rate increase was not expected to be through the system until the end of 2024.
Monetary pain
After the last February meeting, your humble scribe dared write a contrary article that seems to have aged rather well, pointing out that the monetary pain would continue to be increased and also highlighting a telling admission in the Statement on Monetary Policy.
“Given the substantial uncertainty involved with each of the model estimates, it is possible that labour market conditions are already consistent with full employment,” the statement said before adding the rider that the probability was relatively modest.
At the time of that meeting, the latest seasonally adjusted unemployment rate was 4 per cent, which is where it has more-or-less remained over the past year as inflation has more-or-less steadily fallen, proving that the “possible” of February 2024 was the reality.
The central bank has spent a year pursuing its goal of 4.5 per cent unemployment, wanting more people unable to find work because it has persisted with failed modelling that has never been able to compute an inflection point until long after the event.
On Wednesday we’ll find out if the RBA has the ticker to own that mistake or would prefer to obfuscate.
You might think the bank will have mixed emotions if the CPI does land as low as the market expects.
PS> There seems to be a common misconception that the trimmed mean inflation measure forecasts where the headline CPI will end up. It does not. At the end of 2021, the CPI was 3.5%, the trimmed mean 2.6%. The RBA didn’t start (belatedly) lifting rates until May 2022. It would have done better concentrating on the headline number.
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.