In its latest economic outlook for Q1 2023, released this week, KPMG chief economist Brendan Rynne said that while much of the data released over the previous month seemed to indicate that another rise was likely, the pressure on the RBA to end the rate increases has been “unprecedented”.
The chief economist added that the pause at the April board meeting “may also reflect information at the RBA’s disposal, not yet reflected in published data, that inflationary pressures have unambiguously eased”.
Mr Rynne noted that all of the public statements coming from governor Philip Lowe since the March meeting and all of the data that has been available over the past month has pointed to the RBA continuing to hike rates this month.
“Notably, at the Financial Review Business Summit, governor Lowe elaborated on the really important pieces of data that they assess in determining whether to adjust rates upwards or keep as is, being employment, monthly inflation, retail spending, and business surveys,” he said.
“All of these indicators showed a continuing strength in the economy, and combined with statements like, ‘Inflation is too high, we need to keep raising rates, and we will’, suggests the pause in the cash rate has been driven by the non-bank board members who arguably are more in tune with the coalface realities of businesses and households (and politics).”
The RBA’s statement on the monetary policy decision for April 2023 concludes with virtually the same wording as last month, with the exception of one very important phrase that has been revised from “further tightening of monetary policy will be needed” to “further tightening of monetary policy may well be needed”.
Mr Rynne believes the adoption of these two simple words provides the RBA with a “get out of jail” card if inflation risk is now materially different.
“Simply, if inflation starts to drop more rapidly than anticipated on the back of falling aggregate demand, and most likely an accompanying recession, then the RBA now has the capacity to call the top of the contractionary cycle at the current cash rate,” he said.
“If, however, inflation remains elevated, then this statement also gives it the opportunity to stomp its foot back on the economic brake and raise interest rates again.”
The central bank has been grilled by politicians in recent months over its monetary policy decisions, which have resulted in 10 consecutive interest rate hikes.
On Thursday (20 April), Treasury released its review of the Reserve Bank, which noted that the RBA was slower than other central banks across the globe to respond to inflationary risks.
“The Reserve Bank Board began to increase the cash rate target at its May 2022 meeting, only somewhat later than the US Federal Reserve and Bank of Canada, which began increasing their policy rates in March 2022. By comparison, the Reserve Bank of New Zealand and the Bank of England started raising their policy rates in October and December 2021, respectively,” the review stated.
“While the Reserve Bank Board was initially slower to respond to signs of inflation than some of its peer central banks, it acted decisively once underway.”
The Reserve Bank board has increased its policy rate by a cumulative 3.5 percentage points since May 2022. This is one of Australia’s fastest tightening phases of monetary policy in the inflation-targeting era. It is comparable with the increases of other central banks.
The review found that while the bank’s monetary policy framework is fundamentally sound, it should be more clearly defined and regularly assessed for updates.
“Monetary policy decision making should be strengthened, drawing on more expertise and with processes that promote deeper contestability of ideas,” the review said.
“The RBA should become more open and dynamic, through new internal structures and approaches.”
The review recommends the appointment of a chief operating officer, elevating the communication function, and enhancing the processes supporting the board and monetary policy strategy.
