THE Reserve Bank is very low on confidence about the economic outlook, based on the newly-released minutes from its last policy meeting on May 2.
In fairness these are uncertain times, but the very well-resourced RBA is expected to have better insights than anyone.
The main question is how big an impact have we seen from 3.75% of rate hikes in 12 months.
There was little guidance or insights in the minutes, other than observations that retail sales and output are slowing.
Instead, we had general comments like this:
“Members judged that the forecasts were still consistent with the economy remaining on the narrow path on which inflation comes down steadily and the unemployment rate increases but remains below pre-pandemic levels. At the same time, members acknowledged that there were significant uncertainties, and that history highlights the challenges of staying on such a path.”
It seems the RBA decided back in early February that three more hikes were needed, and the pause in April was just to make sure the March credit wobbles didn’t return.
In other words, the onus was on the April data to be weak enough to discourage another hike in May — which it wasn’t.
Now the narrative has changed.
The RBA seems happy with 3.85% at least for a few more months.
The onus remains on the data to be strong enough against expectation for another hike. This has not stopped markets pricing something in.
By definition, the RBA is always data dependent.
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But for now, it’s the lagging data like employment — and very laggy data like wages and inflation — driving decision making.
This risks a policy mistake of overtightening.
As the RBA itself expects, wages won’t peak till later this year. Even that may be too early as more public sector agreements come through.
In this respect I am reminded of the last time this happened in February and March 2008.
Credit wobbles had been building all through 2007. Even equity markets were finally taking notice in early 2008.
Bear Stearns was teetering.
Yet the high CPI print of late January 2008 — on the tail of a mining investment boom — saw the RBA hike twice, from 6.75% to 7.25%.
Wage growth did not peak till 2009.
I am not suggesting another GFC looms. The financial system has been massively redesigned since then (US regional banks aside).
But it shows that relying on inflation and wage numbers to set month by month policy can be dangerous, leaving you well behind the current pulse.
On a final note, if I was the RBA governor I would be already implementing a number of the RBA review recommendations that don’t need legislation.
For example, I would already be changing the meeting schedule to eight a year, followed by a press conference each time.
This would show an evolving RBA that doesn’t need a big shake-up.
Maybe there’s an explanation why changes haven’t happened yet. Maybe they’re still coming.
It would show an RBA stirred into action, not shaken.
Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.
Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.
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