MNI: RBA Risks Credibility, Next Rate Call Unclear-Ex Staffers

The Reserve Bank of Australia's next move will be a test of its credibility and demonstrate how it has interpreted the change in its mandate to include a commitment to sustainably achieve full employment, MNI has been told by former staffers, who remain split on whether to expect a hike or a cut after the Aug. 5-6 meeting.

Should quarterly CPI prove strong – particularly market services inflation – and the RBA still stands pat, the market will question its priorities, said Jonathan Kearns, former head of the RBA’s financial stability department and now chief economist at Challenger. “People might start screaming ‘policy failure,’” he told MNI. “If the bank gets a strong CPI number and has to tighten policy, it is in effect a statement that policy hasn't been tight enough up till now. Tightening policy again will be an admission of policy failure."

MNI reported last week the RBA could be forced to hike at the August meeting should Q2 CPI print at 1% q/q when it is published July 31. (See MNI INTERVIEW: Q2 CPI Could Force RBA To Hike In August) Some have argued the RBA's simplified dual mandate, which was adjusted last year to increase its focus on the labour market, has lead it to be overly protective of employment gains. (See MNI: RBA's Labour Focus To Keep Rates Lower - Ex Staffers)

IF NOT NOW...

If the RBA fails to raise rates next month, regardless of the CPI figure, it will likely continue to hold, Kearns added. “If it doesn't happen in August, that's because we don't get strong price pressure coming in the quarterly CPI and then if we do get some deceleration, then I can't see why the Bank would need to tighten later.”

Domestically driven, market services inflation – which has continued to grow this year – will prove key to the Board’s next move, he added. “If you see any pickup in that domestically-generated price pressure, then the RBA has to evaluate if policy has been tight enough. My view has been that rates should probably have gotten closer to 5%.” Keans gave a hike at the August meeting a 50/50 chance.

The RBA has left the cash rate at 4.35% since its last 25-basis-point increase in November 2023.

A sudden change in RBA behaviour now will leave many questioning the Reserve's strategy, said Sean Langcake, head of macroeconomic forecasting at BIS Oxford Economics and a former RBA economist, pointing to recently-appointed Deputy Governor Andrew Hauser's remarks on employment gains that largely aligned with the Board's past communications.

"Most RBA watchers have been surprised at its tolerance of inflation and willingness to put out forecasts that don't have inflation coming back down [to the 2-3% target] until mid-2026," he said. "[Hikes] are certainly not off the table, but it would be a change in its behaviour.”

THE HOLD CASE

Langcake stressed GDP growth remained weak, which would give the RBA confidence that inflation pressure will slacken. "With GDP going nowhere and such strong population growth, the economy is either moving back to a point where there's less excess capacity or there's more spare capacity and inflation will come off as that happens," he argued, noting fiscal measures will also dampen headline inflation by Q3.

"Is this Q2 print really intolerable in the context of another soft one that's coming down the pipe? The threshold could be fairly high, because [the RBA] is so rooted on this 'riding-it-out' approach. We've all been surprised how slowly they've been prepared to let that happen. Its patience won't be infinite, but the central case is still to run it out."

Luke Hartigan, former RBA economist and now a lecturer at the University of Sydney, agreed the board will likely sit for some time and allow inflation to gradually decline towards target. "Unless there's a really big surprise, but then, looking at what's happening overseas, it seems like inflation is moderating, so I expect that to be replicated in Australia. But we have a bit of a lag, I don't expect there to be any more cash rate increases."