Stephen Miller
The RBA Governor’s Statement on Tuesday appeared to indicate that the RBA Board has learnt from the difficulties facing the Fed and ECB. “Patience” is no longer prudent.
Both the Fed and ECB find themselves in the position of already having made a policy mistake.
Having let inflationary expectations escape the realm of being within their ability to comfortably manage without a serious risk of a substantial growth dislocation, both central banks are being forced to confront the question of the “least bad” approach.
The RBA wants to avoid that circumstance. It now appears to recognise the costs of procrastination when it comes to timely monetary interventions to confront inflation (particularly when those monetary settings are close to historically high levels of stimulus).
The retirement of the “patience” mantra and is an acknowledgement that like the rest of the developed country complex, inflation in Australia has and will surprise with its magnitude and momentum, even if Australia has a more benign starting point.
The RBA wishes to avoid meeting an inflation target by causing a recession, or allowing high and potentially destabilizing inflation to persist well into 2023.
A failure to act in a timely manner runs the risk that the potential dislocation to output and employment down the track could be even greater.
That was the lesson from the ‘70s when runaway inflation / ‘stagflation’ led to the harsh (but necessary) Volcker medicine of the very early ‘80s.
Part of the shift in messaging possibly reflect as an expectation RBA of a confronting inflation challenge with the release on 27 April of the March quarter CPI inflation numbers.
NAB economists forecast core (trimmed mean) inflation at a whopping 1.2% for the quarter and 3.4% over the year. If realised, the six-month annualised rate of core inflation would be 4.4%. Bear in mind, this is even before the full extent of the price pressures unleashed by the Ukraine conflict have been reflected.
An outcome close to the NAB prediction would blow the RBA’s February Quarterly Statement on Monetary Policy (SoMP) forecasts out of the water. Abstracting from any fuel excise cut, these numbers suggests that by mid-year core inflation will be well out of the 2-3% band at closer to 4.0% on an annual basis.
The above scenario unambiguously intensifies the risks of waiting too long; being too “patient”.
The RBA looks to be keenly aware of this. This accounts for the appearance of optionality in the Governor’s April Statement and the retirement of “patience”.
Meetings from hereon in are now “live”.
By Stephen Miller, Investment Strategist
