Don’t mention the Review: the May RBA Board minutes
Plus, the microdata revolution and public policy; US Q2 output gap nowcast and May non-farm payrolls; the mind of Ueda; and the G7 comes full circle
View of Sydney from the top floor of the RBA’s H. C. Coombs Centre in Kirribilli. Photo credit: Stephen Kirchner.
The minutes of the RBA’s May Board meeting were notable for the absence of any mention of the RBA Review. This was surprising to many, not least because the Review contained a detailed and highly critical analysis of Board decision-making.
According to Shane Wright’s inquiries with the RBA, the Review was discussed at the Board meeting. While the minutes are not the place for a detailed response to the Review, at least some acknowledgement of its release and findings would seem appropriate. The omission is inconsistent with Governor Lowe’s previous claim before the House Economics Committee on 9 August 2019 that the minutes are a ‘very comprehensive’ record of the Board’s deliberations and only serves to underscore the Review’s recommendations designed to improve Board transparency.
The minutes were also notable for the analysis given in support of May’s surprise increase in the official cash rate. According to the minutes:
Members also reviewed recent developments in asset markets – in particular, they noted the depreciation of the exchange rate and the increase in housing prices. While several factors had contributed to these developments, the decision to hold interest rates steady in April was likely to have contributed. Although the Board does not target asset prices, members agreed that movements in asset prices provide relevant information and need to be considered when assessing the outlook for activity and inflation.
There is a clear implication that both the exchange rate and house prices were factors supporting a further increase in interest rates, even if only at the margin. There is also an implication that both these developments were partly the result of the decision to keep interest rates steady in April. In other words, the April decision resulted in an unwelcome easing in monetary conditions, at least based on these movements in asset prices. Exchange rate and house price developments in a given month are only very minor inputs into monetary policy decision-making, but they are very meaningful as market-based signals of the stance of monetary policy, as the minutes would seem to concede. It is implicit recognition that the decision to pause in April and then tighten in May was confusing to markets and the public and undermined the effective stance of policy, once again highlighting the Board’s struggles with communications.
Governor Lowe gave a private briefing to members of the House Economics Committee this week that reportedly left them in little doubt that further tightening in the cash rate would be necessary. This is in marked contrast to indications from the RBNZ and the Fed for a near-term pause in their tightening cycles.