As has occurred throughout the developed country complex, Australia’s September quarter CPI surprised on the upside.
The RBA minutes from the October meeting note that the decision between moving the policy rate by 25bps versus 50bps was “finely balanced”.
Arguments for 50bps centred on “the inflationary environment and risks to inflation expectations”, while arguments for 25bps “rested on the risks to global and domestic growth, and the potential for inflation to subside quickly”.
The notion that these judgements were “finely balanced” was reinforced by later comments from RBA Deputy Governor Michele Bullock, who left the door open for a return to higher (40bps or 50bps) policy rate increments by noting that “the size and timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labour market”.
In my view, the October decision was certainly defensible. For one thing, the greater frequency of RBA Board meetings compared with their counterparts elsewhere may have afforded the opportunity of a lesser 25 bp increment in October.
The RBA meets monthly, as opposed to every 6 weeks like most of its developed country counterparts. A 50:25:50 bp sequencing of rate rises over three consecutive meetings would be equivalent to a 75:50 sequencing over two consecutive meetings in other developed country central banks.
It should also be noted that some of the greater annual increase in the CPI was the product of upward revisions to previous quarters.
However, while acknowledging that the October downshift decision may have been “finely balanced” and certainly defensible, the RBA Board may have opened itself up to some awkward optics.
In that context, the upside surprise in the September quarter numbers should probably presage an increment in the size of the policy rate adjustment when the RBA Board meets tomorrow – either 40 or 50 bps.
There is the notion – that episodically comes up in RBA commentary – that Australia’s inflation circumstances are “different” or somehow less challenging than elsewhere in the developed country complex. There may have been some grain of truth in that in the past – but only the tiniest grain – and any “difference” was not evident in the September quarter figures.
The big drivers of inflation in the developed world are clearly present in Australia, as well as some homegrown ones, and it was an underappreciation of them that lay behind the serious missteps in RBA action and communication through 2021. Going forward, it will be important to avoid the same “underappreciation-induced” missteps.
Last Wednesday the Bank of Canada increased the policy rate by 50bps to 3.75% despite having annual inflation to September – both headline and trimmed-mean – much lower than Australia’s. The Bank of Canada has also increased the policy rate by 350bps so far this year, a full percentage point more than the RBA.
That doesn’t mean that the RBA is necessarily on a wrong tack, but it does indicate that the risk with the RBA approach is 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.) It also underscores the notion that just as recession is a risk, so is a premature declaration of victory over the inflation threat.
Having elevated the importance of “risks to global and domestic growth, and the potential for inflation to subside quickly” over “the inflationary environment and risks to inflation expectations” at the October meeting, the September quarter CPI result argues for a reversal of that emphasis in November.
Stephen Miller is an Investment Strategist with GSFM. The views expressed are his own and do not consider the circumstances of any investor.