RBA Board maintains settings

From

Stephen Miller

There were no real surprises from the RBA Board meeting today with the Governor’s Statement reaffirming that the Board is sticking with the settings outlined in September.

Today’s statement preserves the RBA’s cautious approach to the withdrawal of historically high levels of monetary stimulus despite some the cautious optimism attaching to the ability of the economy to bounce back from the headwinds of the delta variant and associated lockdowns.

The RBA approach appears more cautious than most other developed country central banks. The Norges Bank recently became the first developed country central bank to raise the policy rate in the post-pandemic period and is widely expected to be followed by the RBNZ tomorrow. The Bank of England, the Bank of Canada and even the Fed (via the ‘dot plot’) have all indicated a strong likelihood of policy rate increases through 2022.

The point of difference between the RBA and the others is underscored by the RBA’s expectation that that the condition for any increase in the policy rate “will not be met before 2024.”

It is not a surprise that the RBA is happy in the current circumstance to lag the global normalisation of policy rates. The key difference between Australia and others is that the absence any “lived experience” of wage and / or price inflation.

However, central banks (like markets) are not always good forecasters of their own policy actions or for that matter, inflation (witness the Fed’s performance in 2021). That is not a criticism but more a cautionary note that while wage and price inflation is yet to manifest itself in any serious way in Australia, the type of supply disruptions in goods and labour markets that have seen an acceleration in inflation elsewhere, along with its greater than anticipated persistence, have the potential to force the RBA’s hand sooner than its current expectation.

The current RBA forecasts only have that trimmed-mean inflation reaching the bottom of the 2-3% inflation target band in June 2023, and even then, wages are forecast to be running at a modest 2 ½%. In my view the risks are heavily weighted to the upside.

In this sense the RBA may face the same “quandary” that concerns Fed Chairman Powell: viz, inflation and “frothy” financial asset and real-estate prices (and attendant potential financial instability and wealth inequality) when the economy (because of geographic and skill mismatches) is short of central bank employment objectives.

To be fair these problems are beyond the ability of monetary policy to solely influence, highlighting the requirement for supportive structural (’supply-side’) policy and fiscal policy.

By Stephen Miller, investment strategist 

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