RBA locks itself into 25bp rate hike in December

RBA governor Philip Lowe and his board have almost locked in a 25 basis point rate rise next month and will be hoping that the December quarter inflation data doesn’t surprise them.

The jobs and jobless numbers lock in another interest rate hike from the Reserve Bank in early December – absent some global left-field catastrophe.

That is a statement of the bleeding obvious.

Less obvious, but far more importantly, the RBA has locked itself into a 25-point rate hike.

It can’t do the 50 points that is arguably required – and required, as a bare minimum.

RBA governor Philip Lowe thinks he is delivering assuring certainty and stability - and delivering less rate pain (to borrowers, that is, not depositors) - by dialling his rate hikes back from the 50 points he was doing for most of the year.

He thus delivered 25 points in both October and November, and will again in December.

The critical messaging was in the minutes of the November Cup Day meeting, released earlier this week.

This was where board members emphasised “consistency”; that having delivered only 25 points in October, that there was “consistency” in doing 25 points again.

Well, now having done two 25-pointers in a row, it makes it even harder to suddenly go back to 50 points – to really ‘Grinch Christmas’.

They did in fact have a very good reason to go back to 50 points in November: the ‘higher than expected’ – that’s to say, higher than expected by the RBA – inflation numbers, released just before the meeting.

Furthermore, it made the most basic sense: we only do 25 points in October, to see what the inflation numbers show; they showed inflation higher than we thought, so we have to go back to 50 points.

Now, Lowe and his board are stuck with only doing 25 points in December, and ‘hoping’ that inflation doesn’t surprise (them) again when the December quarter numbers are published at the end of January, just ahead of the RBA’s next meeting in February.

Governor Lowe is making a huge bet on the December quarter inflation numbers.

If they are reassuringly benign – that’s, ‘benign’ in RBA-speak if not in economic reality - the bet will pay off.

Reserve Bank of Australia governor Philip Lowe. Picture: NewsWire / Monique Harmer

The RBA will still be on its – self-described – “narrow path clouded in uncertainty”.

If they are not, if inflation comes in higher than the RBA ‘expects’, the RBA will have plunged off that path.

It would then be starting 2023 in an even bigger pickle than it started 2022 – having to contemplate far more punishing, NZ-style rate hikes, or totally shred any remnants of its former credibility.

Bizarrely, and really quite embarrassingly, the RBA actually lifted its inflation forecasts in its November policy statement – while effectively saying “nothing to see here”.

Previously it said inflation was going to top out at 7.75 per cent; after the September quarter inflation numbers it upped that to 8 per cent.

Far more damningly – and also far more potently in terms of stirring rate uncertainty through both 2023 and 2024 – it rather brazenly predicted it would still be failing to do its job at the end of 2024!

The RBA is mandated to keep inflation in the 2-3 per cent range; and if it goes above the 3 per cent, to get it back below 3 per cent.

Yet, here was the RBA predicting inflation would still be above 3 per cent – sure, just above at 3.2 per cent, but above nevertheless – at the end of 2024.

That is to say, it was predicting its own failure fully two years into the future.

And even that rested on the RBA’s ‘optimistic’ predictions of plunging inflation.

Personally, I doubt it will.

It’s all because Governor Lowe is clinging to the hope that he can gently, gently - and slowly – bring inflation down, while preserving the very low official jobless number.

That’s wishful thinking masquerading as analysis and policy. And doing your job.

Originally published as RBA locks itself into 25bp rate hike in December