RBA’s rate promise is only a prediction

Reserve Bank Governor Philip Lowe. Picture: Jane Dempster/The Australian

Reserve Bank governor Philip Lowe has made it explicit and public – he still does not believe the RBA will be lifting its official interest rate until 2024.

But there are two absolutely crucial things to understand.

First, whereas before the RBA’s policy meeting on Melbourne Cup Day – and indeed the release of the September quarter inflation figures the previous week – it was a promise, now it’s just a prediction.

Of course, it had always been the case - since the whole RBA policy edifice built around an all-but zero 0.1 per cent interest rate and the locking in of that rate until April 2024, had been put in place at the last Melbourne Cup day meeting in 2020 – that the ‘promise’ could have been broken.

But now it’s just a ‘prediction’ which might or might not prove accurate.

Personally, frankly, I would not want it to prove accurate.

The world in which we got to 2024 and the RBA had not touched its official rate, would be a more unpleasant world than the one which, difficult and challenging as it might be, delivered rising interest rates.

Reserve Bank Governor Philip Lowe. Picture: Jane Dempster/The Australian

The world outlined by Lowe to explain his prediction is much more a ‘Candidean’ best of all possible worlds than a ‘just right’ Goldilocks one.

Secondly and further, the ‘no official rate rise until ’24’ scenario most certainly does not mean, we won’t see earlier increases in home loan variable interest rates, just like we have already seen rises in fixed rate home loans.

Indeed, such rises – even as much as half to three quarters of a per cent, on the current rates around 2 per cent – are on the way to becoming self-fulfilling.

Indeed, such rises could ‘do the RBA’s job for it’, and in the process reinforce its determination to keep its official rate at the near zero 0.1 per cent.

Now, Lowe really had made all this all-but explicit in his statement, as I explained at the time, after the Cup Day meeting.

The RBA is embarked on not raising its rate until inflation has not only risen into the 2-3 per cent target band – broadly to the 2.5 per cent mid-point – but is sustainably there.

That means two things, one obvious and one not so obvious.

First, the inflation has got to stay there for at least two quarters.

The RBA is not going to hike the first time it jumps there – as it will in this current December quarter.

But secondly, and critically, the RBA would be prepared to see inflation above 3 per cent without hiking.

True and importantly, only just above 3 per cent and only for a short-time – one quarter, two quarters absolute max.

The RBA does not see inflation getting even into the 2-3 per cent band on a sustained basis unless and until wages rises are coming at 3 per cent-plus levels.

This is what it all comes down to: the RBA does not see that before the second half of 2023.

Absent that, it does not see the inflation running at 6 per cent-plus levels in the US coming downunder.

Absent that, it does not see the inflation we’ve already seen in Australia – but more like 3 per cent-plus – being sustained and triggering higher wage rises.

But now these are all ‘predictions’.

The accuracy – and the RBA’s reaction – will be put to a crucial test with the CPI numbers at the end of January.

I suggest they will be higher than what’s implicit in the RBA’s updated inflation forecasts.

The RBA’s ‘get-out card’ is the way the market is pricing in one rate hike in 2022 and another in 2023.

That will force up bank costs and likely trigger some lift in variable rates.

The RBA might find that ‘convenient’.