With so many people getting it wrong about the Reserve Bank’s surprise hike in interest rates, an easy response may be not to shoot the messenger but to hire one.
Borrowers were among those caught on the hop, lulled by media reports to expect that the central bank would pause again in lifting rates, if they hadn’t peaked already.
Investors, who had estimated the risk of a hike as minimal, will likewise be tallying losses.
As it happens, recommendation 10.5 in the wide-ranging RBA review was a call for the appointment of a “chief communications officer” to give bank executives “a richer understanding” of what stakeholders – the public included – need to know.
Surely, such a person might have helped us better anticipate yesterday’s rate rise?
Don’t bet your mortgage on it, said Warren Hogan, chief economist of Judo Bank, and one of the minority of economists to forecast Tuesday’s cash rate lift to an 11-year high of 3.85%.
“You’re not going to get any more information from a chief communications officer,” Hogan said. The recommendation was “one of the more hilarious parts of the review” since central bank governors would inevitably have PR primacy.
Hogan, who said the cash rate may rise another 50 basis points to 4.35%, said that there was always going to be “a lot more instability” in messaging as the RBA neared the end of its rate cycle. For many of the first 10 increases – a record run that ended with April’s pause – the question was more the size of the hike, not whether one was coming.
The consequence was that every line of new data is now examined more intently, with economists and the media inevitably amplifying its importance. The jobless rate remaining low with lots of new full-time positions equals an elevated rate rise risk; a softer inflation number, the opposite effect. Seasoned pundits misfired.
“There have been a number of decisions in this tightening cycle that have been surprising to markets,” said Westpac’s chief economist, Bill Evans, who only last week shifted the bank’s forecast to predict the rate had peaked, with cuts to start next February.
Those surprises included the decisions to hike the rate by 50 basis points in June (instead of 25) and by 25 basis points in October (instead of 50 basis points).
“Markets and the majority of economists, including Westpac, had difficulty in following the bank’s guidance,” he said.
The RBA could have been more helpful in telegraphing its intent.
The summer break meant no RBA meeting in January and scant appearances by executives. Investors and economists, perhaps with a lingering suntan, were taken aback by the hawkish board meeting to kick off the year in February.
“The board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary,” governor, Philip Lowe, said. That doused hopes that only one more rise might be required to tame inflation.
March’s board meeting marked a dovish turn, backed up by Lowe dropping the “p-word” (pause) for the first time the following day.
And then the pause indeed landed in April.
Since that 4 April meeting and Lowe’s National Press Club address, RBA officials appear to have surfaced only twice. One of those two events was Lowe’s response to the RBA review that, while generally accepting of the recommendations, also contained some angst that the parts were “far from the reality”.
Rate inclinations, in other words, were not the topic of that day.
And, perhaps unhelpfully, the March inflation figures landed on 26 April, very close to the pre-board meeting “information blackout”.
If Lowe or another RBA executive had wanted to highlight concerns about the run up in services inflation – the 6.1% was the fastest since 2001 – they really only had 27 or 28 April to do it.
Hogan said one review recommendation might have made a difference.
Had the RBA been holding only eight meetings a year rather than 11 – as the US equivalent does – “we wouldn’t have had the pause” and all the speculation that ensued.
Sometimes less can really be more.
