Uncertainty Merely Delaying RBA Hike

Back To The Future: Uncertainty Merely Delaying RBA Hikes

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• Assertive rate moves show RBA broke with convention of caution in 2008 and 2009
• But this definitive approach to policy was temporary
• Monetary policy increasingly will balance an uncertain near-term against bullish medium-term outlook

The RBA delivered an unprecedented three consecutive rate hikes in the December quarter, but surprised everyone by pausing at the first Board meeting of 2010 in February. For sure, the policy framework that justified the three hikes was uncharacteristically (though justifiably) backward looking, and so was bound to represent a temporary mind-set. Once the extreme policy accommodation had been sufficiently withdrawn, policymakers were expected to turn more circumspect. At the time, though, the brisk exit from “emergency” settings, amid continued strengthening of domestic data, created the illusion that officials were chasing a moving target. The impression was that the RBA would continue the tightening cycle at the first meeting of 2010.

We now know that officials already had shifted their sights. Indeed, as indicated in the minutes of the December Board meeting, members saw the 75bp of tightening delivered over 4Q09 as “materially shifting the stance of policy” and “increasing the flexibility available to the Board.” By February, these comments had been forgotten by economists, and the point of introspection was assumed to be some way off. It seems that the absence of a Board meeting in January—and, more generally, “radio silence” from RBA officials—created a vacuum that was filled only by exceptionally strong retail sales, consumer confidence, and employment data. This drew the market’s attention away from the weight of policy measures already undertaken.

ENDS

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