RBA Governor Philip Lowe got the market hares running with last week’s speech to the Anika Foundation.
As part of an ongoing obsession with spotting a RBA pivot, the market commentariat trumpeted that the RBA was about to imminently reduce the monthly policy rate increment to 25bps. This after a reference to a couple of unremarkable notions that monetary policy operates with a lag and that the case for a slower pace of increase in interest rates becomes stronger as the level of the cash rate rises.
Investors should be wary of the commentariat punditry. After all, the pivot obsession has in the past led the commentariat to predict “eight of the last two pivots”!
It may be that markets have missed the key messages in Lowe’s address. That message is that RBA Board wishes to give itself maximum optionality when it comes to determining the size and timing of future policy rate increases and that incoming data will be the most important determinant of the future policy rate trajectory. Hence Lowe’s carefully worded counsel that the RBA was “not on a pre-set path” when it came to future policy rate increments.
Given the current elevated level of uncertainty that attaches to both the domestic and global economic outlooks, that seems entirely appropriate.
Of course, that is not necessarily inconsistent with a step-down in monthly policy rate increases but nor does it any way make that eventuality any nearer than it might have appeared prior to the Lowe address.
After last year’s ill-fated guidance that the conditions for a policy rate increase “will not be met before 2024,” the last thing the Governor needs to do now is to appear to pre-commit to a policy path that is subject to the aforementioned uncertainty.
Some commentators have warned that given the lags in monetary policy there is a risk that the RBA may overdo it and plunge the economy into recession.
That is a risk, but so is a premature declaration of victory over the inflation threat.
It might be that too soon a reduction in the policy rate increment also runs the risk of letting the inflation genie run amok.
On that front, it is clear that higher frequency price and wage data continue to exhibit considerable momentum.
That what Lowe described as the “scourge” of inflation is a clear and present danger.
Tuesday’s release of the NAB Monthly Business Survey continued to exhibit troubling inflation portents for the September quarter and beyond.
Final product retail prices in the August survey increased at a quarterly rate of 3.3%; the same record rate as was recorded in July.
Such momentum indicates a danger of the emergence of the sort of inflation inertia that was last experienced on a global scale in the late 70s / early 80s. (It lasted a little longer in Australia.)
Moreover, it is suggestive of some upside risk to the most recent RBA trimmed-mean inflation forecast, issued just over a month ago, of a 6% increase over the year to the December quarter 2022.
Investors should therefore regard any notion of a near-term RBA pivot with the maximum of caution.
It might well turn out to be yet another case of the market hares running toward the inflation hounds.
Stephen Miller is an Investment Strategist with GSFM. The views expressed are his own and do not consider the circumstances of any investor.
