Economists have been left scrambling to recalibrate after the Reserve Bank wrong-footed markets on Tuesday, holding the cash rate steady despite widespread expectations of a cut.
The decision has prompted some to declare a new era for the central bank, with CBA senior economist Belinda Allen noting: “What’s clear from today’s decision is that this is a new RBA.
“The board is asserting its independence. Votes are taken and published. Forward guidance is limited given the board make the decision, not RBA staff. The old days of massaging market pricing towards the likely outcome has gone.”
Economists had widely interpreted the absence of any pushback from the RBA in recent weeks as a quiet endorsement of a rate cut. Instead, the surprise move has been taken as confirmation that the central bank’s approach to communication and decision making has materially changed under the two-board system implemented earlier this year.
The forecasting community, once attuned to subtle RBA signals, is now facing a more opaque and independent central bank, less interested in steering expectations and more focused on asserting its institutional autonomy.
This shift has prompted Allen to suggest that while the RBA’s evolving stance points to November as the more likely timing for a rate cut, CBA still formally expects the move to come in August.
“A further rate cut in this cycle cannot be ruled out, particularly if the slower easing cycle hinders the expected recovery in the household sector,” the economist said.
Like many economists, Allen had interpreted what has since been described as a sharply dovish tone at the RBA’s May meeting, including discussion of a potential 50 basis point cut, combined with rich market pricing and the data flow, as making a July rate cut the most likely outcome.
This included economists at CBA’s big bank peer, ANZ, which shifted its rate call from August to July mere days before the board’s meeting.
Its economist Adam Boyton didn’t, however, assign as much significance to the RBA’s decision to hold as Allen.
Instead of declaring the emergence of a “new” RBA, Boyton simply noted that the downside risks which had preoccupied the board in May appear to have receded.
“Looking ahead, we expect the RBA board will decide to cut the cash rate in August,” the bank’s head of Australian economics said.
“We also see an additional easing beyond August as more likely than not. As a result, we remain of the view that the ‘terminal’ cash rate for this easing cycle will be 3.35 per cent.”
While Westpac’s economist Luci Ellis said the RBA had defied both market pricing and consensus expectations, she highlighted that when Westpac brought its forecast forward from August to July, it had cautioned that a cut this month was never the “shoo-in” markets had assumed.
“The RBA has been a reluctant rate-cutter in recent months, especially earlier in the year,” Ellis said.
Still, she described the decision to hold as surprising and noted that the 6-3 split vote underscored just how finely balanced the decision was.
“Given the lack of consensus on the board, the low information content of the post-meeting statement was not that surprising; this was the text a split board could agree upon,” she added.
Westpac continues to forecast cuts in August, November, February, and May, maintaining a terminal rate forecast of 2.85 per cent.
NAB’s Gareth Spence also expects cuts in August and November, with a new February cut added, taking NAB’s terminal rate to 3.1 per cent.
“We continue to see a return to a more neutral policy stance as appropriate though the RBA looks to be moving there more cautiously than we had previously expected,” he said.
Unlike some of his peers, Spence didn’t spend much time deliberating on what this means for the future of the RBA’s decisions, simply noting it “surprised markets and the consensus view of economists”.
Interestingly, the three banks that have disclosed their terminal rates do not appear to align.
Whether this is due to the RBA’s communication approach remains to be seen. At the media conference, governor Michele Bullock confirmed that if market pricing again diverges from the board’s eventual decisions, the RBA will not use an inter-meeting speech to guide expectations, citing that doing so would risk prejudging the board’s subsequent choices.
Westpac’s Ellis sees this as one of the downsides of the RBA review recommendations, sharing that not only are there fewer inter-meeting speeches by senior officials now that Bullock does a post-meeting press conference, but those opportunities might also no longer be used to steer market pricing.
In her final warning, Ellis added: “The spread-out timing highlights the risk that the RBA will be surprised on the downside by inflation later this year and need to catch up.”
