The RBA has previously viewed a more static cash rate as a source of confidence and stability, said Simon.
“[The cash rate] is very slow moving and if they become a bit more reactive or more agile, I think that would be a good thing for their management of the economy,” he continued. “But what we need to understand now is how do they translate the moves up or down? And how do they think about moves today, moves tomorrow, and balance those considerations out?”
ALTERNATIVE SCENARIOS
RBA officials for the first time presented the Board with two alternative scenarios at the February meeting: one in which underlying CPI undershot the 2.5% midpoint target if the cash rate held at 4.35% for two years, and another featuring multiple 25bp cuts over the same time frame. (See chart)
Hauser’s comments detailing the scenarios were akin to forward guidance, aiming to offer the market greater transparency on the RBA’s strategy while downplaying expectations of further cuts, Simon continued.
However, he criticised the scenarios for only presenting extreme paths. “The net of that announcement was actually a tightening compared to the market, but they did it with the cut up front," he noted. "[The RBA] has got to work on its messaging and the scenarios should have been in the SMP [Statement on Monetary Policy] and explained much better, because I think they do help to understand what's the basis of its thinking.”
Still, the Reserve has attempted to increase the transparency of its strategy and reaction function, he argued.
"Which I happen to think is a good approach," he said. "Given [underlying inflation] is above the target already, their forecasts should be erring on the side of overshooting on the downside a little bit, and if good shocks come along then they cut quickly.”
The market has been accustomed to the Reserve moving multiple times in a cycle, but Hauser’s comments suggested it would be unlikely to follow up February’s cut with further easing without additional cause, Simon added.
The market has priced in a 65% chance of a 25bp cut at the May 20 meeting and a 3.44% cash rate by the end of the year, but Simon believes domestic traders were likely influenced by U.S. trade policies and overestimating their impact on the Australian economy, at least in the short term.