After February RBA meetings go ‘live’ again

RBA governor Philip Lowe. Picture: Nikki Short

Reserve Bank Governor Philip Lowe and his fellow directors and RBA management have been on a journey over the last two months and which will reach its destination at the next meeting on the first day of February.

It is a journey away from the broad stimulus package that has prevailed since the early days of Covid and which reached its zenith at the RBA’s Melbourne Cup Day meeting in 2020.

At that meeting, the RBA cut its official policy interest rate to the all-but zero 0.1 per cent; the 0.1 per cent was applied to a wide range of policy instruments; and most pointedly, the RBA made its ‘promise’ not to lift it until early 2024.

And I quote from that November 2020 statement: “the Board is not expecting to increase the cash rate for at least three years”.

At this October’s meeting, all the elements around the 0.1 per cent were left still in place; including the ‘promise’.

And I quote from this October’s statement: “the central scenario for the economy is that this condition (for a rate rise) will not be met before 2024”.

The ‘promise’ was critically underpinned by the RBA’s targeting – by buying bonds – of the April 2024 Commonwealth bond yield at that 0.1 per cent.

The underpinning collapsed after the release of the September quarter inflation data at the end of October, which showed headline inflation kicking up to 3 per cent and underlying inflation to 2.1 per cent.

RBA governor Philip Lowe. Picture Stephen Cooper

Heavy selling of that 2024 bond drove the yield towards 1 per cent; any attempt by the RBA to hold it at 0.1 per cent became completely untenable.

So, at its meeting this Melbourne Cup Day, the RBA formally abandoned that yield targeting. It also half-walked away from the ‘promise’. The “not before 2024” was replaced by “this is likely to take some time”.

However, the forecasts in the RBA’s November statement still predicted that the conditions for a rate rise would still not develop until early 2024. I characterised it as the RBA switching from a ‘promise’ that there’d be no rate rise until 2024 to now a ‘prediction’ there wouldn’t be.

Well, Tuesday’s meeting took yet a further step away from 2024 towards an earlier rate rise; indeed, not just potentially in 2023 but – in my judgment - in 2022, and possibly even relatively early in 2022.

But not, I should hasten to add ‘as early’ as February; but which nevertheless certainly now makes that coming February meeting pregnant with expectation; and what it delivers – critically, on the RBA’s $4bn-a-week money-printing. The February meeting will all-but certainly slash the printing; the question over the next two months is whether it gets slashed all the way to zero – effectively, the precede to any rate hike.

In this latest statement, the comment on the timing of the first rate rise was much more generalised, while repeating the “this is likely to take some time” formulation.

The ‘promise-now-a-prediction’, though, remained underpinned by the November forecasts that still implied no rate rise before 2024.

However, if the RBA was redoing those forecasts now, it would be upgrading across the board – business investment, consumer spending, and critically, GDP and jobs growth as at the end of this year and in 2022.

The RBA will formally redo its forecasts ahead of the February meeting. Absent Omicron having tipped the whole world, and narrowly Australia, back into a 2022 Covid nightmare, the much stronger outlook for the economy will be formalised in them.

We’ll have also seen higher inflation than the RBA expects.

All this will complete the RBA’s journey away from its ‘no rate rise until 2024’. We will then go back to the conventional ‘will they or won’t they’, from meeting to meeting.