MNI: RBA Higher-For-Longer Shift Follows CPI Surprise-Ex Staff

The Reserve Bank of Australia has pivoted towards indicating that rates will stay higher for longer in order to bring inflation back to its 2-3% target after a period of what some ex-staffers described to MNI as confused communications as it calibrated policy to preserve gains in the labour market.

Third-quarter inflation data caught the RBA by surprise, said Sean Langcake, head of macroeconomic forecasting at BIS Oxford Economics and a former RBA economist. The RBA board broke a four-month pause to lift the cash rate 25bp on Nov. 7 to 4.35%, its highest since 2011, and Statement on Monetary Policy forecasts pushed the date at which inflation drops to the top of the target band six months to December 2025.

“It has a pretty serious inflation problem on its hands, there’s no two ways about it – it has more work to do,” Langcake said, adding that the fresh forecasts have inflation higher in the near term and embed most of an additional 25bp rate hike within the assumptions. RBA Assistant Governor Marion Kohler noted this week that the next stage in bringing inflation back to target "would be more drawn out than the first.”

Langcake doubted whether newly-appointed Governor Michele Bullock had driven the communications shift. “It's just the realisation that those relatively optimistic inflation forecasts will not come to pass,” he said.

Bullock’s statements following the September and October meetings were almost indistinguishable, Langcake noted. “But the October minutes were extremely different [from the statement], and this is where the language around having a ‘low tolerance for upside surprises’ creeps in,” he noted. “It’s an interesting observation that they're using the minutes in that way, because to me those minutes didn't necessarily seem to resonate as coming from the same meeting.”

Langcake said the RBA had wanted loose policy to preserve labour market gains. Unemployment has hovered about historically low levels for the last 12 months, with October's result of 3.6% illustrating the job market's resilience. The RBA lowered its peak unemployment forecasts last week to 4.25% by December 2024 from its previous 4.5% prediction. (See charts)

COMMUNICATION BREAKDOWN

Some former staffers have accused the Reserve of failing to communicate adequately that rates would stay higher for longer compared to international peers, placing its credibility and inflation-fighting appetite at risk.

Mariano Kulish, University of Sydney professor and a former RBA senior manager, noted that Federal Reserve Chair Jerome Powell’s October communication represented a stark contrast from the RBA's past statements, which suggested the cash rate's level would continue to restore the balance of supply and demand. Meanwhile, the Fed had delivered more increases and U.S. inflation had fallen further, yet it still believed more hikes were needed, he added.

Pointing to the U.S. bond market selloff and gains in long-term yields, Kulish noted the higher-for-longer message had clearly sunk into markets there, but the same was not true in Australia. The RBA’s communications had added confusion at times, he said.

The RBA should present transparent ideas on different possibilities, but perfection was impossible, said Langcake. "There's been some egregious errors and a lot of people with hindsight would say some of them should have been perceived," he added, noting the RBA pointing to surprising services inflation, while mentioning the experience of peer economies overseas, was confusing.

HIKE HORIZON

While November’s Governor’s statement dropped language indicating that “further tightening” may be necessary, Langcake believes the RBA could again raise the cash rate in December or February.

“[The RBA] was a reluctant raiser in November – clearly it wanted to ride this out without hiking again,” he noted. “And it is now sufficiently worried about the inflation outlook, that it’s gone back to hiking. I don't think a single 25bp hike will assuage all its concerns and so for that reason, it would be prudent to just get it done and go in December. The CPI data was strong enough to justify that.”

CPI rose 1.2% in the September quarter and 5.4% y/y, while the monthly read – released simultaneously – increased 5.6% y/y, ABS data showed in October.

Kulish noted real rates remained low and the real cost of borrowing was not that high. “This explains to some extent why a lot of households are still willing to borrow," he said. Kulish has called for higher rates since August.