June policy meeting minutes reveal seminal shift in RBA interest rate decision process

The RBA’s June policy meeting minutes have revealed an important shift in the way Governor Phil Lowe and his board operate their interest rate decision making process.

This June’s Reserve Bank policy meeting could come to be seen as the utterly pivotal one of Governor Philip Lowe’s term.

The minutes of the meeting, released Tuesday, certainly confirmed a seminal shift in the way the RBA under Governor Lowe – almost certainly in the last few months of his term – operates its interest rate decision process.

A shift that has so far snuck under the commentariat radar.

Bluntly, it might come to be seen as the meeting that delivered the famed – or infamous – ‘rate hike too far’. That, again bluntly, made recession inevitable.

Or as the one that squibbed on delivering a much more emphatic anti-inflation 50-point hike, in the immediate wake of the 6-9 per cent total bottom-line national wage increase. There is, also, a tiny chance that it could come to be seen as getting its last hike exactly right; delivering on Lowe’s “narrow path” to bringing inflation down below 3 per cent, while maintaining near full employment.

Wrapped up in this is the seminal shift between the board and RBA management headed of course by Lowe.

Simply, at these last two meetings in May and June – April’s was a bridging exercise – Lowe has switched from making a single recommendation to giving the board two alternatives. At almost every meeting since the early 1990s – with very rare exceptions in specifically extraordinary circumstances - successive governors Fraser, Macfarlane, Stevens and Lowe have delivered a single policy recommendation to the board table. It was up to the board to approve or reject that one option, with the expectation of approval after rigorous debate and management cross-examination, in the context of a longer-term policy agenda.

But in June, according to the minutes, released Tuesday, and I quote: “Members discussed two options: increasing the cash rate by 25 basis points; or holding the cash rate unchanged.”

This very precise form of words – and trust me, they are always very deliberately chosen – has never been used before in RBA minutes, or for that matter in the actual day’s policy announcement.

Exactly and I mean exactly the same words were used in the May minutes – although interestingly, and instructively, the other way round.

That might suggest that in May there had been a slight preference for repeating April’s pause (but, after discussion, option two was adopted); while in June the slight preference was for the hike which was delivered.

The April minutes had been much vaguer about a specific choice between ‘two options’.

This suggests one of two dynamics on Lowe’s part.

Either he is deliberately moving pre-emptively to bring the current board procedure more into line with what was recommended in the RBA review, with explicit votes.

Or it reflects genuine uncertainty - after all the hikes since May last year - about each further hike, or pause, at every meeting, starting in April. Or perhaps a bit of both.

Either way, this will mean genuine uncertainty about decisions at future meetings - given two choices going into the meeting - until members emerge at lunch. That is until we go back to one recommendation because the inflation – or recession – die is well and truly cast.