They are queuing up now, and why not? The Bullock RBA is schmozzle. Poor communications. Terrible forecasting. Empty intellectual integrity. Rules on the run.
Here is Luci Ellis at Westpac taking her pound of flesh.
As was widely expected, the RBA cut the cash rate this week by 25bps to 4.1%. Inflation has declined faster than the RBA’s previous forecasts implied, with underlying inflation running at an annualised rate consistent with the 2–3% target over the second half of 2024. Getting inflation sustainably back down to target is the Board’s highest priority. Given these data and the likely near-term outcomes that they imply, it would be difficult to say that the goal is off-track. The post-meeting statement acknowledges the progress made on getting inflation to target, and that inflation might be declining a bit faster than earlier expected.
The post-meeting communication also highlighted that the RBA assesses policy to still be restrictive. Indeed, some refinements to the RBA’s models for estimating the neutral rate now suggest that, even after this week’s cut, monetary policy is more restrictive than the RBA thought three months ago.
So why was the RBA’s rhetoric so hawkish? The press statement highlighted that there was a risk of easing ‘too much too soon’, in which case disinflation would ‘stall’ and inflation would ‘settle above the midpoint of the target range’ – exactly what their forecasts show trimmed mean inflation doing. The Governor went out of her way to challenge the market’s view of the likely path of the cash rate, describing it as ‘far too confident’ and ‘unrealistic’.
Part of the reason for the hawkish move is ‘lingering tightness’ in the labour market. The prior easing in the labour market had ‘stalled’ over the second half of last year. While the Governor declined to provide an estimate of the NAIRU – the unemployment rate that is consistent with full employment – the structure in the forecasts suggests that the staff are still working on the assumption that it is around 4½%. The RBA’s framework (appropriately) goes beyond this single number and considers other variables such as underemployment and vacancies. But it seems to have remained quite unresponsive to the evidence of wages growth coming in lower than expected – including, at the margin, this week’s WPI data.
The hawkish tone is also an outworking of the 2023 RBA Review. Recall that the RBA Review recommended, and the latest Statement on the Conduct of Monetary Policy adopted, a framing of the inflation target that requires the RBA to set policy ‘such that inflation is expected to return to the midpoint of the target’, even though ‘all outcomes within the target range are consistent with the Reserve Bank Board’s price stability target’.
The key point here is that RBA’s revised forecasts now have trimmed mean inflation constant (dare we say ‘sustained’) at 2.7% out to mid-2027. Recall that trimmed mean inflation was already running at an annualised rate of 2.7% over the second half of 2024. So the RBA’s forecasts imply no further disinflation from here at all, if policy were to follow the market pricing at the time the forecasts were finalised, which was for about 90bps of cuts. (The RBA’s forecasts are put together assuming the cash rate follows the path implied by market pricing at the time the forecasts are finalised.)
It seems that, in the new world, 2.7% is not good enough: policy must be set to show 2.5% at the end of the forecast period. It also explains why in the post-meeting press conference, the Governor emphasised that people still needed to be patient to get inflation down – down by a whole 0.2ppts. (Yes, year-ended trimmed mean inflation is 3.2%, but that is all base effects from the first half of 2024. In the current environment, though, the forward pulse in inflation is better represented by calculations with less stale information in them.)
In an unusual move, Deputy Governor Hauser was quickly wheeled out in a Bloomberg interview to settle things down after the first round of communication generated some confusion (and pushback) among commentators and market participants. And he did strike a more placatory tone, highlighting the good news on inflation and the possibility that labour supply might be higher than assumed.
The key piece of new information revealed in that interview was that the Board reviewed a scenario of unchanged cash rates that had inflation undershooting the midpoint of the target, ‘not by a lot, but by a little bit’. Assume this means 2.3%. Contrast that with the published forecasts with (trimmed mean) inflation settling at 2.7%.
So, we see a 0.4ppt difference in inflation a couple of years from now, given a difference in the cash rate of just under 1ppt. This is around double the sensitivity of inflation to interest rates in the RBA’s flagship MARTIN model, and above the rules of thumb that most Australian policymakers have in their head about how the Australian economy works.
If the RBA has revised up its estimate of the sensitivity of inflation to interest rates in recent times, this has not been widely signalled. But, even with this greater sensitivity, what we are seeing is an RBA trying to finesse a scenario where inflation lands at exactly 2.5% instead of 2.7%. This is the epitome of fine-tuning – something monetary policymakers are supposed to avoid.
Given the RBA’s communications difficulties this week, it is not clear that this recommendation of the RBA Review represents an improvement on past practice.
Too right. This RBA is worse, not better for the vast majority of Australians.
Close the failed bank and install an AI.
