RBA gets a policy makeover as homeowners sweat on early pain relief

A new era in monetary policy begins for the ­Reserve Bank board on Monday. Picture: Brent Lewin/Bloomberg

Tax cuts have dominated the news over the past fortnight but the price of borrowing money is going to occupy centre stage this week, as Australians hope for a clearer picture on the big questions.

Is the inflation fight over? When will mortgage rates start to fall? Will the stage three tax ­revamp keep interest rates higher for longer?

From Monday, a new era in monetary policy begins, as the ­Reserve Bank board, which sets official interest rates, shifts to a new meeting cycle: discussions over two days (instead of one) and eight meetings a year (rather than 11).

The policy decision will still be announced at 2.30pm (AEDT) on Tuesday, but from now on it will be in the name of the board, rather than governor Michele Bullock. An hour later, Bullock will hold a news conference, mainly aimed at informing households and businesses about the RBA’s reading of economic conditions and the ­future course of interest rates.

The governor says it’s an ­opportunity “for journalists to clarify and probe issues raised in the post-meeting statement, better equipping them to analyse the decision for the public”.

No doubt if the financial markets charge too far in the wrong ­direction, the session could be a platform for Bullock to “jawbone” some sense into, or calm the nerves of, the herd.

At the very least, this next narrative phase for the RBA is going to be more difficult after the befuddled intervention on rates by the three Labor stooges from Brisbane, Melbourne and Perth.

Market players will be paying more attention to any change in language in the board’s post-­decision statement, as well as the central bank’s new quarterly economic forecasts which will be revealed straight after board meetings in February, May, August and November.

Commonwealth Bank head of Australian economics Gareth Aird, speaking for many analysts, declares the case to leave monetary policy on hold “is stronger than at any point in the last two years” and he sees “no chance of any other outcome”. He argues that while there’s still work to do to get inflation back in the 2-3 per cent target zone, the RBA is “in the home straight”.

A lot has happened in nine weeks since the previous RBA board meeting in early December, which kept the cash rate target at 4.35 per cent and cheered up home buyers over Christmas and the summer holidays.

For one, there is a new ­Statement on the Conduct of Monetary Policy, the ground rules if you like, between the federal government and RBA board on the monetary regime, as well as how both parties are responding to last year’s independent review of the central bank.

Over the past two months, the economic data show a slowing economy, with retail sales plunging and the major capital home markets cooling. But the labour market is holding up, showing a jobless rate still below 4 per cent, in steady defiance of the RBA’s 13 interest rate hikes since may 2022.

In the new era, RBA governor Michele Bullock will be conducting a press conference after every board meeting. Picture: Lisa Maree Williams/Bloomberg

The eight RBA board members – the ninth, incoming deputy governor Andrew Hauser is due to start next Monday – will be presented with a fresh set of forecasts on inflation, growth and employment by former federal Treasury head of macroeconomic conditions Sarah Hunter, who started as the bank’s chief economist a week ago. The most welcome piece of recent news for the board will be the fall in headline and core inflation in the December quarter.

The annual change in the consumer price index was 4.1 per cent and 4.2 per cent for the “trimmed mean”, compared with the RBA’s November forecasts of 4.5 per cent for both measures.

Luci Ellis, who until recently presented RBA staff forecasts to the board, says the new two-day format will give members more time to discuss the outlook and risks, and officials more time to present scenarios and other analysis that could not easily be fit into the previous agenda.

Now Westpac chief economist, Ellis says that given concerns over the stickiness of services inflation, as well as community and market prices growth expectations, the board is unlikely to rule out further rate increases in its post-meeting communication. “But the case to raise rates from here is steadily losing traction,” she says.

Chief economist at Westpac, Luci Ellis. She was previously the former assistant governor and senior economist with the Reserve Bank. Picture: Jane Dempster/The Australian

Economists also expect the RBA to trim its forecasts on inflation and GDP growth for the next two years, but with expected unemployment rates unchanged.

Ellis believes it’s “entirely possible” that staff forecasts, which will extend to June 2026, can now be shown with inflation ending the period at 2.5 per cent, the midpoint of the 2-3 per cent target range.

“Specifying when inflation would reach that midpoint was one of the recommendations of the RBA review,” Ellis notes.

As well, monetary watchers ­expect the revamped quarterly policy statement to feature a deeper discussion on how the RBA is balancing its inflation and full employment objectives.

Jim Chalmers said after the CPI news last week that it wasn’t a “mission accomplished” moment in the inflation battle.

Still, the Albanese government is hoping rejigged tax cuts, which go far and wide across income groups from July 1, but stiff top earners, will help families meet living costs without igniting inflation.

A growing number of analysts are expecting the central bank to deliver interest rate cuts from ­September.

But EY chief economist Cherelle Murphy cautions mortgage holders to remain patient, as risks persist and “cuts this year could be premature”.

Murphy points to continued strong demand for housing, rising insurance premiums and a tight labour market, while conflict in the Middle East and global shipping issues could also be a source of upward pressure on energy and transport prices as the year rolls on.

You can bet that with the inflation comfort zone still years away, the RBA board won’t be shifting its language on the job at hand any time soon or paying heed to the dopey provincials.