Two weeks ago, the RBA shocked markets by hiking rates when there was a pretty strong agreement that rates would be held steady. Tomorrow’s release of the minutes will give some additional insight into why they did that, and what could happen in the future.
There is particular interest in the RBA (and BOC) because it had paused hikes earlier in the year and was apparently forced to resume them. This plays into speculation about what could happen to other central banks that are looking to pause. If inflation isn’t fully under control when the central bank gives up on tightening, there is a risk that price increases could come back. That could get in the way of most predictions for future rates.
Central bankers vs the market
In many cases, the markets are pricing in a different trajectory than central bankers are forecasting. The biggest is of course the Fed, which insists it will keep rates steady after reaching its terminal rate. The market says that it will cut rates before the end of the year. The BOE is another major central bank that has committed to keep rates high after reaching the terminal rate. But markets are pricing in as many as three cuts before the end of the year.
What isn’t being discussed much is central banks hiking even more after hitting the “terminal” rate. In a certain respect, that’s what happened with the BOC and RBA, which reached a point in which they thought inflation was largely under control. Facing economic uncertainty, they opted to pause. And a few months later, inflation was moving higher, and they were forced to intervene again.
Too soon or not enough?
There is a broad consensus about a depressed global outlook. Many say there will be a recession, the rest are banking on a “soft” landing. Which is still a landing, not a takeoff. Central bankers will not want to tighten too aggressively in that scenario as they could end up getting the blame for causing a recession. And maybe the blame is deserved.
The BOE has notoriously been hesitant to act aggressively, raising rates slowly and facing higher inflation than the ECB or the Fed that has opted for up to triple rate hikes. While the Fed started a “pause” (or a “skip”, depending on what happens at the next meeting), the interest rate is still not down to target. The ECB is debating whether to pause starting in July, but also inflation is not down to target. The thinking is that the previous tightening will keep having an effect in bringing down prices, since there is a delay between policy implementation and results in prices. But that’s also what the RBA and BOC thought when they started their pauses as well.
What to look for in the minutes
The main difference with the RBA is that it only had a couple of months of downwardly trending inflation, and that in the middle of winter when demand was going to be lower for seasonal reasons. That might have led the RBA to pause too soon. This analysis could become more plain the discussion about inflation in the minutes and help ease potential worries among investors that other central bankers will face a similar problem.
For the Aussie specifically, the focus is likely to revolve more around how much more hiking the RBA might be inclined to do. If they erred on the side of easing last time, will they overcorrect now, and err on the side of tightening?
