Stephen Miller

 The outcome of today’s RBA meeting is a difficult one to call.

According to the 22 economists polled by Bloomberg, eight expect a 25 bp increase, eleven expect 40 bps and three expect 50 bps.

I think it is a fine judgement but I expect only a 25 bp increase. That conjecture is based on my assessment of RBA process. In making that judgement, I’m not inclined to offer a defence of that process.

The RBA had already seen the March quarter CPI when it delivered a 25 bp increase on 3 May. In all likelihood, it had also completed the forecasts issued in the May Statement on Monetary Policy (SoMP) that had headline inflation peaking at close to 6 per cent by year-end and the RBA’s favoured trimmed-mean measure peaking at 4.6 per cent also at year-end.

In terms of additions to the RBA information set since that decision there doesn’t appear to be anything in my mind that would occasion the RBA Board to wish to accelerate the pace of tightening from 25 bp increments.

The Wage Price Index (WPI) increased by a modest 0.7 per cent qoq or 2.4 per cent yoy.

The National Accounts showed solid growth but not enough to accelerate fears of overheating. On the inflation side, significant price pressures were evident, with the household consumption deflator up 1.5 per cent and the domestic demand deflator up 1.4 per cent, both the strongest quarterly rise since 2000. That, however, is old news.

Wages growth as measured by average compensation per employee remained modest at 2.2 per cent yoy, although average hourly earnings were up sharply probably reflecting COVID induced employee absences in the quarter.

The forgoing is my assessment of the RBA Board thought process.

Even if I think that the RBA deliver a 25 bp increase on Tuesday, that is not to say a strong case can’t be mounted for a 40 or 50 bp increase.

Many developed country central banks have increased the policy rate by 50 bp increments as the persistence, magnitude and momentum in inflation has surprised, as it has in Australia.

The Federal Reserve did so at its last meeting in May and is widely anticipated to do the same in June and July.

The Bank of Canada and Bank of New Zealand have delivered consecutive 50 bp increases with more of the same to come.

There are calls for the European Central Bank to do the same, although the curse of institutional inertia that afflicts most pan-European institutions makes that unlikely soon.

The Bank of England (BoE)has resisted 50 bp increments despite a pressing inflation problem, with BoE Governor Andrew Bailey curiously exclaiming that he felt “helpless” in the face of global price pressures.

A 40-50 bp rise on Tuesday could be framed as a reflection of the lessons learned from the travails of other central banks: that acting early after demonstrable inflation surprises is preferable to later. A failure to act now might occasion even more aggressive increases later with an attendant greater growth dislocation. This is the “stitch in time saves nine” approach to rate increases.

I’m not sure the RBA is there yet.

By Steve Miller, investment strategist

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