The RBA’s latest cash rate increase
Plus, Governor Lowe’s near-death experiences
The RBA’s July Board meeting decided to increase the cash rate target by 50 basis points to 1.35%. It also increased the interest rate on Exchange Settlement balances by 50 basis points to 1.25%. The ES balance rate serves as a floor for the actual cash rate, which can now be expected to trade between 1.25% and 1.35%.
The increase in the cash rate was in line with market expectations. Prior to the meeting, Governor Lowe indicated that the choice before the Board was between a 25 and a 50 basis point increase. He also ruled out a 75 basis point increase. The official cash rate target is now the highest it has been since the RBA lowered interest rates by 25 basis points to 1.25% on 5 June 2019. The RBA said that ‘The Board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead,’ cueing up a further increase in the cash rate in August.
The RBA said that ‘inflation is forecast to peak later this year and then decline back towards the 2–3 per cent range next year.’ The RBA will next update the inflation outlook in its 5 August Statement on Monetary Policy, following the release of the June quarter CPI on 27 July. Governor Lowe has already flagged a 7% inflation forecast for this year.
The US June CPI on 13 July will let us finalise our local Q2 trimmed mean inflation forecast. As things stand, our model implies a 1.5% q/q and 4.7% y/y rise for the trimmed mean compared to 3.7% y/y in Q1. This is already above the RBA’s May Statement on Monetary Policy forecast of 4.5% for the year to June and the 4.6% expected by the end of the year.
For the record, here is where the local econ punditocracy stands on the cash and exchange rate outlook from the AFR’s latest quarterly survey:
Further to last week’s post on who should be on the RBA Board, the issue was taken up in a feature article in The Saturday Paper under the headline, "Reserve Bank: ‘If you know about monetary policy, you’re disqualified’.” The journalist is late to the story, but the fact that the composition of the RBA Board is now recognised by prominent journalists as an issue worthy of a long read is significant progress on where we were just a few years ago.
Tim Harcourt had a piece arguing for labour movement representation on the RBA Board, alongside small business and farmers, with the significant qualification that their ‘insights can be combined with respect for the economics profession and economic principles.’ If the RBA Board is to be viewed as a representative body, then it is hard to object to including representation from the labour movement. Bob Hawke and Bill Kelty both sat on the Board in that capacity, but they don’t exactly make them like Bob and Bill anymore. Both had formal training in economics (Hawke at Oxford, Kelty at La Trobe) and so tick Harcourt’s respect for economics box. Kelty resigned from the Board after the election of the Howard government in 1996. But as argued in the previous post, formulating optimal policy responses to shocks requires policymakers to look past whatever representative baggage they might bring to the Board table.
We learned this week from John Kehoe that RBA Governor Lowe nearly died on two separate occasions in 2016, the first within hours of being appointed Governor. Apparently, the incidents recently became the subject of whispers in the financial sector, leading the AFR to approach the Governor for clarification. Given that these were acute episodes with no long-term implications for Lowe’s capacity to perform his duties, these near-death experiences can be appropriately viewed as a private matter. But they are arguably more of a story now because they were not disclosed then.
Former Labor federal minister Craig Emerson had a piece arguing for caution in further tightening monetary policy, a caution which I share. However, Emerson’s advice was marred by references to ‘monetarist thinking’ as the supposed inspiration for overly zealous monetary tightening. As I hope this newsletter has made clear over the years, monetarist thought has been at the forefront of warning against the dangers of overly tight monetary policy. Paul Krugman’s gratuitous references to ‘sado-monetarism’ (adapted from William Keegan) also overlook the fact that market monetarists have been at the forefront of arguing for easier monetary policy in recent years. To the extent that monetarists are calling for tighter monetary policy now, that only serves to underscore the symmetry of their policy advice. Unfortunately, the ‘monetarist’ label is often used carelessly, without paying attention to what actual monetarists advocate. If you are going to reference ‘monetarist thinking,’ you should at least cite a monetarist thinker who says what you think they say.
The FT talks to prospective replacements for BoJ Governor Kuroda: “One job I do not want ever is to be the next BoJ governor.”
Ken Rogoff reviews The Money Illusion in the Times Literary Supplement.
While ASIC seeks to extend its ban on OTC binary options for retail investors until 2031, CME Group will be offering $20 event binaries from September to US retail investors.