Lost in Translation

Inconsistent, unexplained and ultimately ... correct

To be clear, today's surprise interest rate was probably the right move. Inflation remains incredibly high, unemployment incredibly low, and both these facts are expected to persist for the foreseeable future.

What is much less excusable is the “how” of the interest rate increase.

In last month's meeting, the RBA stated they would put interest rates on hold because they wanted to see how the economy would bear the high interest rates that have been unfurled over the past 12 months. In the brief 4 week window that followed the most significant data point we’ve had is an inflation report that, while far too high, was actually lower than both markets and RBA forecasts expected. Other data points, like the unemployment rate, business surveys, and retail spending were largely as expected.

If the RBA wanted to wait to see how things developed, and the main piece of data you received painted a slightly better picture of inflation, than a consistent approach to policy would imply that holding again in May would be correct thing to do. Which is exactly what markets expected to happen.

Instead the RBA hiked interest rates by another 25bp.

Making up for past mistakes

It is hard to get upset at the RBA for this decision on the merits - even if it is somewhat inconsistent with last month’s pause. Ultimately the RBA should do the right thing by the Australian economy - even if it means changing its mind.

However even though the RBA knew their decision would catch markets and economists off guard (the probability of a hike was pegged at only 12%), they did little to explain why they changed their minds. They didn't hold a press conference, despite knowing the outcome would be incredibly surprising, nor did they explain in their statement why they changed their stance. Instead, they seem to have simply decided to disregard the reasoning of the previous meeting's minutes - with no clear explanation at all.

Fortunately, while the RBA declined to give a press conference, Phil Lowe is due to speak at the RBA Board Dinner tonight in Perth. I am sure the issue of todays surprise hike will be addressed. However, this is a poor substitute for a press conference, as speeches usually have few questions with limited follow up. And while I am sure the Perth press corps is full of diligent reporters, the RBA is largely not their beat.

In response to the Review, Phil Lowe said he would discuss their recommendations with the Board and how the RBA would respond to them. You would assume the topic was discussed today at the subsequent Board meeting, but today's statement provides no indication of what conclusions they drew or even if they discussed the recommendations at all!

Hopefully, the RBA minutes of this meeting, which will be released in two weeks (!), shed more light on their reasons for changing their minds and how they will respond to the review's recommendations. For a central bank that has recently been told that they are untransparent about their thinking and decision making process, the Board seems strikingly uncurious about remedying any of the faults outlined by the review!

PS For those wondering about the post’s header image I asked the AI midjourney to imagine “the unexpected”. I think it fulfilled the brief.