Reserve Bank Board meeting week and, as expected, official interest rates were kept on hold. But there was an important change in the statement explaining the announcement.
The words are now more important than the actual decision.
From saying “a further increase in interest rates cannot be ruled out” in September, this week’s statement said “the Board is not ruling anything in or out”.
A small, subtle change but one which many economists see as an indication the RBA believes interest rate settings are currently about right.
But as I’ve said before, as she breathes new life into the RBA and the role of Governor, Michele Bullock has become Australia’s financial therapist.
At this week’s press conference she continued to put a “face” to the traditionally faceless RBA Board and her down-to-earth approach is powerful. She connects. And she uses the platform as a financial therapy session to get into the hearts and minds of average Australians.
She knows you can analyse economic data all you want, but the key to success is impacting the behaviours of Australians and bringing them along for the ride.
The economy isn’t some inanimate economic model, it’s a reflection of the behaviours of 26.8 million living, breathing human beings who make important economic decisions as consumers, employers and workers.
Getting inside their heads and influencing those behaviours is a powerful tool to manipulate future economic data.
Bullock knows this is a fragile time for the economy. It has been tough for average Australians to cope with the fastest, sharpest rise in official interest rates in our history, while they also fight the effects of raging inflation.
The RBA has put the rate squeeze on every Australian household with a mortgage to help bring inflation back under control towards that 2-3 per cent preferred target range. As a result, unemployment is shaky, business insolvencies are rising and the economy is looking fragile.
But it’s working and inflation is trending down nicely.
The danger for Bullock is that we all let out a collective sigh of relief that the worst is over, rates have peaked, there is light at the end of the economic tunnel, rate cuts are coming and… we all go out and spend so inflation comes back.
Yes, we’re past the crossroads, but we’re in that sensitive period where all the good work from the economic pain we’ve endured can be reversed and the shock of another rate rise could be needed.
Which is the last thing we need.
Yesterday’s unexpected fall in unemployment back down to 3.7 per cent is what Bullock is afraid of. The RBA has warned all along that a tight jobs market fuels pay rises which, in turn, fuel inflation.
The previous month’s increased unemployment to 4.1 per cent was seen as good news for interest cuts in the second half of the year. Yesterday’s drop is bad news and could indicate that rate cuts are further away than many people expect.
The strong debate within financial markets is whether the first rate cut will come in August or later in the year.
So, Bullock-the-financial-therapist lays us all out on her couch, explaining that while the anti-inflation campaign is working, she would like us to stay in the bunker for a bit longer to make sure the inflation genie stays in the bottle.
Even this week we get told higher interest rates “cannot be ruled out”. It’s why in the Bullock press conference she said the economy and rates “are finely balanced”.
The fear of rising interest rates keeps our behaviour in check.
The RBA statement announcing the decision to keep interest rates on hold again had statements like:
“The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the board is not ruling anything in or out.”
“We are not ruling out what we might have to do next. We’re not ruling in or out anything.”
“The headline monthly CPI indicator was steady at 3.4 per cent over the year to January, with momentum easing over recent months.”
The statement once again made numerous mentions of a “highly uncertain outlook”. Just in case you didn’t get the message, there were seven references to “uncertainty” in the statement. Yesterday’s unemployment drop was an example of one of those uncertainties.
Timing is going to be everything for the RBA economy. The ideal is a “Goldilocks economy” — not too hot and not too cold.
But economies are hard to turn around, both on the way up and on the way down. The red-hot, inflation-driven economy has definitely turned down towards RBA targets. But now that downward momentum can’t run out of control as, at some stage, it needs to be slowed to level out within the target ranges and stay there.
The economy is so finely balanced that I suspect we’ll be having quite a few more sessions with our financial therapist over the coming months.
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