Credible forecasts are overtaken by events.
Forecasts made in the May Statement on Monetary Policy and comments by RBA Governor Philip Lowe on the likely path of interest rate rises have been overtaken by more recent events and made credible forward guidance impossible, MNI understands.
The Reserve Bank of Australia announced a hawkish surprise this week, hiking rates by 50 basis points to 0.85% in the biggest move in more than 20 years and moving away from any forward guidance to a policy which the bank said would be “data driven," (see MNI STATE OF PLAY: RBA Turns Hawk In Biggest Hike Since 2000).
MNI understands the central bank has been surprised by the momentum for inflation and events such as the recent surge in gas and energy prices, which it sees were exacerbated by a relatively weaker AUD in recent months. Other events, such as flooding in coal mining areas of NSW and Queensland have added to the turmoil.
Earlier comments by RBA Governor Philip Lowe that interest rates could be at 1.5% by year’s end and rise to 2.5% in this cycle should not be considered as a promise, or reflecting the new reality, MNI understands, as those comments were made in a different context.
SUPPLY SIDE SHOCKS
While the RBA now sees current rates as too low, it is loathe to put any targets or likely rate scenarios given the succession of supply side shocks, and the potential for more to come. The RBA is also closely watching signs of economic slowdown in the US, the UK and in Europe while keeping a close eye on China where the “zero COVID” policy could create more lockdowns and disruptions to both demand and supply.
Instead, the central bank is closely monitoring more immediate economic data on petrol prices and electricity, which can be updated almost in real time, rather than basing its moves on quarterly data from the Australian Bureau of Statistics on inflation and growth. The RBA welcomes plans for monthly ABS reporting on inflation when this occurs later this year.
MNI understands the RBA believes that peak inflation will be higher than forecast in the May statement, which had CPI inflation at 5.9% at the end of this year before falling to 2.9% by June 2024.
First quarter inflation came in at 5.9%, the highest in two decades, and trimmed mean inflation – the RBA’s preferred measure – is at 3.7%. The RBA has a target range of 2% to 3%, and under the May forecasts inflation would be back inside the target by June 2024.