Yes, it's embarrassing to be so certain about a call that turns out to be wrong. And having so much company doesn't make it any better. So how did the forecasting community and we pet shop galahs so misunderstand the Reserve Bank board?
Turns out the mistake was to think there was a significant break between the December and February meetings. It seems two months is not a long time in central bank land, or not long enough for new data to substantially change the RBA's announced, confirmed and twice-blessed policy.
What do investors think the outlook is for interest rates? Visit Adele Ferguson's exclusive Investor Pulse column tomorrow
The kindest reading would be that the Martin Place crystal ball was functioning so well that the mandarins were ahead of the game, expecting back on December 1 all the signs of a stronger economy and inflationary flares that have come to pass and, therefore, they had already taken appropriate action.
In any event, it looks like the board picked up yesterday's agenda almost as if it was the second half of the December 1 meeting.
“Now where were we before being interrupted … ah yes, according to the minutes: 'Members saw the arguments as finely balanced, but concluded that the stance of monetary policy would best reflect the circumstances facing the economy over the period ahead if there were an increase in the cash rate of 25 basis points at this meeting. Members saw this adjustment, together with those in the preceding two meetings, as materially shifting the stance of policy to a less accommodative setting and, therefore, as increasing the flexibility available to the Board at future meetings.'
“So, it was a close-run thing last time round, we really had done some heavy lifting and jolly-well deserved a holiday. Indeed, we'd lifted rates so much, we'd built some flexibility into our timetable next time luncheon beckoned. Rate rises every meeting aren't good for the indigestion.”
Overbalanced
Or something rather like that. The decider on top of the sentiment at the meeting was Westpac and, to slightly lesser extents, the CBA and ANZ, pushing rates higher again.
Thus, in the RBA's thinking, if December's 25 cash rate points were “finely balanced,” Westpac's extra 20 must have meant policy had overbalanced.
The banks' extra monetary kick was almost the only reason given by the Governor yesterday for sitting pat:
“Lenders have generally raised rates a little more than the cash rate over recent months and most loan rates have risen by close to a percentage point. Since information about the early impact of those changes is still limited, the Board judged it appropriate to hold a steady setting of monetary policy for the time being.”
Indeed, if the RBA had increased rates yesterday, only a couple of words in Glenn Stevens' statement would have required changing. If it had been possible to cocoon a gaggle of economists away from the news, it would have been an interesting exercise to have them study the Governor's statement, minus the two lines announcing no change, and then decide what the missing two lines actually said.
Given that much of the statement described an Australia with cheap money, a strong labour market, falling unemployment, house prices jumping, CPI inflation showing a bit of a surge, home building and public infrastructure seamlessly taking over the job of boosting demand from the Rudd stimulus package and world GDP growing at close to trend this year – well, you could be forgiven for guessing wrong even after the event.
Cautious note
Aside from the last rise being such a close-run thing and the banks going a step further, you have to read the statement with knowledge of the outcome to pick up any misgivings. There's really only one note of caution:
“Credit conditions nonetheless remain difficult in the major countries as banks continue to face loan losses associated with the period of economic weakness. Concerns regarding some sovereigns have increased.”
Basically, the most of the rest of the developed world remains an unhappy place.
To my way of thinking, the mention of “Chinese authorities are now seeking to reduce the degree of stimulus to their economy” was neutral – it perhaps lessened a reason to raise rates, but wasn't necessarily a worry. After all, Beijing is only doing a little of what the RBA is doing.
Also neutral is the RBA's apparent confidence that inflation won't be a problem this year, despite the other factors listed by the bank itself.
But of course the Martin Place crystal ball has been programmed with some inside knowledge – the certainty the RBA will be jacking up rates soon enough to contain those inflationary urges.
Or I could be wrong. Again.
Michael Pascoe is a BusinessDay contributing editor.
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