MNI: RBA Forward Guidance Unlikely As Uncertainty Rises
MNI (MELBOURNE) - Reserve Bank of Australia Governor Michele Bullock will continue to refrain from offering forward guidance following next week’s board meeting no matter the outcome, former RBA staff told MNI, noting global economic uncertainty will make forecasting harder and lead to an emphasis on risks.
“The appetite for forward guidance has gone down, not up, given higher uncertainty,” said Justin Fabo, founder and head of research at Antipodean Macro and former head of international financial markets at the RBA.
U.S. trade policies meant RBA economists will find developing a narrative to fit their forecasts difficult, he added, pointing to labour market projections that have continuously failed to reflect reality. “They will not be in any rush to give a signal that they're going to do a lot more easing,” he continued. “I'm certainly one that's in the camp that they come out and deliver a cut [next week] with much less conviction than markets think.”
Fabo believes the market’s pricing of an implied 90% likelihood of a reduction at the Feb 17-18 meeting is “crazy,” though other former RBA officials have noted that political and public pressure for a cut is likely to prove critical whatever the merits of such a move. (See MNI: Australian Rate Cuts To Be Gradual- Former RBA Economists)
A cut next week would also require delicate adjustments to February’s Statement on Monetary Policy, but would not be likely to involve a change to the Bank’s 4.5% non-accelerating inflation rate of unemployment (NAIRU) estimate, Fabo added, noting the RBA had downgraded its assessment of the importance of that metric.
"They get pushed to give estimates on the output gap and the NAIRU and this is always going to be problematic, because people will then gravitate toward one number, whereas most sensible economists, including those in the Bank, say they don't really know where it is, [just] 'here's our range of estimates.'"
Fabo noted the Bank’s messaging will revolve around risks ahead and stress that policy is not very restrictive.
“They will say ‘we're just taking the edge off that to support growth, we're doing it carefully, because as far as we can tell the unemployment rate's still very low, capacity utilisation is above average and the output gap is still positive, even though they look to be slowly closing.’”
FUTURE COMMUNICATIONS
John Simon, adjunct fellow at Macquarie University and head of the economic research department at the RBA between 2014-2024, noted the Reserve needed a more coherent communications strategy that offered some form of guidance.
However the RBA has a mindset of “doing what’s needed” and communicating decisions after the fact, and Bullock is a product of the institution, he said.
“Whether they cut now or in a few months’ time… there'll be a nice solid rationale for it,” he said. “There's a path of least resistance, which is going to surprise the market. And certainly last year they did push back when they thought the market had got ahead of themselves about a rate cut. But we haven't heard anything like that this time.”
The downside of not offering forward guidance means the RBA struggles to formulate future strategy and risks becoming too reactive meeting to meeting, he added. “That I think increases the chances of them making a mistake,” he argued.