If rate hikes are on autopilot, just say so
The Reserve Bank of Australia, which raised its benchmark rate another 50 basis points on Tuesday, insisted that borrowing costs are not on a “predefined path”. The RBA used the same language last month, although August board meeting minutes suggested no other outcome was contemplated. Now, after four consecutive half-percentage-point hikes, it’s hard to accept assurances on the variety until some are delivered.
Yes, at some point the rate of increases has to slow down. With the main rate now at 2.35% – the highest since 2015 – the RBA is a striking distance from neutral, a vaguely defined place that neither stimulates nor hinders the economy. Normally, this would be a good opportunity to catch your breath, even if it’s not deep, and think about all there is left to do. But with inflation well above the bank’s 2-3% target, cutting hikes now to 25 basis points – the increase the RBA said in May was “business as usual” – would require bravery. JPMorgan Chase & Co. is forecasting another 50 basis point step in October, followed by a quarter point move in November, then an “extended pause”.
There was a time when the new language in monetary communications could be brought to the bank, literally. That was before the pandemic, which prompted a rush to zero rates — or below — and huge bond buying. Things were moving so fast that it was unwise to take for granted what officials had said the week before, let alone a month earlier. Now, in the race to catch up with runaway inflation, we again have to set aside what would normally have been of significant importance.
Perhaps one of the things that central banks are now really dependent on data, a position often spoken but not always respected. The number that is first among equals is now inflation. The news is not encouraging for the RBA. Consumer prices rose 6.1% in the last quarter. Inflation is expected to peak at just under 8% later this year. Other than that, the economy has shown reasonable health. Retail sales jumped in July, while the unemployment rate fell to 3.4%. That doesn’t mean it’s all rosy. The economy shed jobs that month, thwarting expectations of strong gains. The real estate market is fragile. Most Australian mortgages have flexible rates, which means that when official rates go up, the cost of paying off a loan goes up too.
Australia also faces an unfavorable international environment. As with past rate decisions, the central bank checked off the things that went wrong beyond local shores: slowing global growth, tightening global monetary policy, Russia’s invasion of Ukraine, and constraints on the Chinese growth. Asia’s dominant economy – and Australia’s biggest trading partner – is struggling in a crisis in the property sector and a Covid-zero policy that locks down major cities. China is the only country of any real importance that is actively considering further easing measures.
Adding to the quagmire, the RBA seems haunted by a dramatic communications breakdown. As recently as late last year, the bank’s forecast was that rates might not rise until 2024, a ridiculous proposition in hindsight, even though the underlying idea – that the peak of inflation would be short-lived – was in the global mainstream. For Governor Philip Lowe, it’s a mistake that won’t go away, akin to Federal Reserve Chairman Jerome Powell’s call that the price spike would be “transient.” Powell also pointed out that politics is not about cruise control. Even after two giant Fed hikes of 75 basis points and advice that at some point the increases may taper off, a third at this month’s meeting of the Federal Open Market Committee is a real possibility.
Does discarding self-imposed qualifiers such as “not on a predefined path” reflect a perceived need to overcompensate for keeping rates too low for too long? It would be understandable, but too bad. Lowe has scheduled a major speech for Thursday, complete with a question-and-answer session. Think of it as the de facto press conference after Tuesday’s rate decision. The RBA’s communication will be considered as part of the independent investigation into the central bank commissioned by the government. All this is predefined, and rightly so.
More from Bloomberg Opinion:
• Soaring dollar is a mixed blessing for the United States: Mohamed El-Erian
• Powell can’t count on a labor market miracle: Jonathan Levin
• The World Central Bank is being tested. In Australia: Daniel Moss
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was Bloomberg News’ economics editor.
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