(Bloomberg) – Economists and investors criticize Australia’s central bank for confusing communications after it raised interest rates by twice as much as expected, having previously signaled a preference for quarter-point moves.
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The Reserve Bank on Tuesday increased its cash rate by 50 basis points to 0.85% – the largest hike in 22 years – following a 25-basis-point rise in May. That sent government bond yields surging and the stock market falling.
It also wrongfooted swaps traders who were fully pricing in a 25-basis point move and saw 40 as the next most likely. Money markets have now shifted to predicting the RBA will keep moving aggressively and take the cash rate above 3% by year end. That implies a 40 basis-point hike at each meeting – rather than the 25- or 50-basis point increments the RBA prefers.
“It’s got to the point now where you just can’t rely on anything the RBA tells you,” said Darren Langer, a fixed income portfolio manager at Yarra Capital. “Now they’re just going to keep the market guessing. I don’t think that’s a terribly good way to run monetary policy. “
Langer said a widening gap between yields on Australian 10-year government bonds and Treasuries implied that offshore investors now “see Australia as a more risky proposition.”
The confusion stems from Governor Philip Lowe’s comments after the May 3 meeting, when he said the RBA’s quarter-point increase represented a return to “normal operating procedures.” That was interpreted as meaning the RBA wouldn’t need to use outsized hikes because it met monthly and could move in short, quick steps, unlike the Federal Reserve which convenes less frequently.
“Come June they hike 50-bp – something they hadn’t done in twenty years. Someone has a sense of humor, “said Alex Joiner, chief economist at IFM Investors Pty., In a tweet.
The RBA has been under pressure since the onset of the pandemic. Initially for being slow to respond to the demand shock from virus-induced lockdowns and later for only implementing a quantitative easing program after the currency had jumped.
It has also been chided for poor economic forecasting. Then, late last year it scrapped a yield target amid a bond routines, causing losses for some investors, and finally abandoned its forward guidance on rates earlier than expected.
Lowe has acknowledged the RBA’s early, gloomy forecasts about the pandemic-era economy didn’t come to pass. He says stronger-than-predicted domestic activity, hiring and inflation allowed policy makers to raise rates much earlier than the initial guidance of 2024.
“From a forecasting perspective, that’s embarrassing. We should forecast this better. We didn’t, ”he said at a press conference after the RBA’s May meeting. “But what we did in 2020 was to make sure that we took every possible step that we could take to help the country.”
The RBA’s surprise half-point hike and accompanying hawkish commentary prompted a number of economists, including at Australia’s biggest banks, to boost their cash rate predictions, with many now forecasting another half-point rise in July.
Aggressive tightening raises the risk of a hard-landing, particularly given the heavy debt load carried by households, much of which was built up from entering the property market.
Separately, the RBA is facing its first review in a generation as new Treasurer Jim Chalmers makes good on a pledge to ensure the nation’s monetary and fiscal regimes are fit for purpose.
Chalmers said Wednesday that the review is expected to begin in the next few months and be completed around mid-2023.
(Adds comment from bond investor from fourth paragraph.)
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