RBA increases 25bps: defensible but risks “awkward optics”

A little surprisingly, in my view, the RBA Board meeting today (4/10) decided on a downshift in the size of the policy increment from 50bps to 25bps. Today’s move took the policy rate to 2.60% from 2.35%.

In opting for a 25bp increment the RBA Governor in his Statement following the meeting cited two key factors.

The first was growing uncertainty in the outlook for the global economy which it described as having “deteriorated recently”.

The second was how household spending in Australia responds to the tighter financial conditions.

The Governor’s Statement appeared to indicate that the difference between 25bp and 50bp was a fine judgement.

The Statement reiterates that “the Board expects to increase interest rates further over the period ahead” and further, that it “remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”

Certainly, while acknowledging that the downshift may have been a fine judgement, and is certainly defensible, I fear that the Board may have opened itself up to some “awkward optics” if the extraordinary momentum in high-frequency price and wage measures show up in an outsize increase in the September quarter CPI.

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. However, while housing is retreating from the frenetic price and activity action that followed on from massive (and manifestly excessive) monetary stimulus, the labour market and the consumer have shown striking resilience.

 Still, it must be acknowledged that recession is a risk.

 But so is a premature declaration of victory over the inflation threat.

On that front, high frequency price and wage data, including the newly minted ABS monthly inflation indicator, and price and wage data from the NAB Monthly Business Survey, point to the risk of a sizeable increase in the RBA’s favoured trimmed-mean measure of inflation.

The momentum in the high frequency data 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.)

Still, as the Governor noted in his Statement, the path to returning inflation to the 2-3% target and keeping the economy on an even keel “is a narrow one and it is clouded in uncertainty.”

In this context, the RBA Board might be grateful were “awkward optics” to be the extent of its challenges over the coming period.

Stephen Miller is an Investment Strategist with GSFM. The views expressed are his own and do not consider the circumstances of any investor.