Rate lift off in May 2023 was the Deutsche Bank call last night.
‘Too easy for too long’ is the protest, and it’s nonsense.
In Banking Day’s opinion, under the stewardship of Dr Philip Lowe, monetary policy has been conducted better and more justly by the Reserve Bank of Australia than ever. I mean this.
I’ve been around for all of Lowe’s and deputy Guy Debelle’s careers. We were all raised in the momentous frightening era of the recession-prone 1970s and 1980s.
Entrenching the memories of this period, this will be Lowe’s legacy if he manages it. The 1990/91 recession was awful, banks stressing again.
That the big banks shamefully wasted the benefits of the TFF and ignored the SME Loan Recovery Scheme, on this score the Council of Financial Regulators has failed dismally.
Phil O'Donaghoe, Chief Economist for Deutsche wrote “we find our own view on rates less tethered to RBA's forward guidance than it has been previously.
“As such, we bring forward our own call for rate liftoff to May 2023, 12 months earlier than we previously expected, and 6 months earlier than the RBA's revised guidance today.
“Specifically, we expect a 15bp hike in May 2023, with a further 50bps of hikes in H2-2023, taking the cash rate to 0.75 per cent by Dec 2023.”
O'Donaghoe, an overt hawk, summed up yesterday’s monthly Monetary Policy Decision:
“The key outtake from today's Board meeting is an upwardly revised inflation forecast driving a hawkish shift on rate lift-off guidance from mid 2024 to the ‘end of 2023’.
Stepping back, that shift in guidance in itself is hardly remarkable, O'Donaghoe said.
‘It appears the RBA's revised central scenario now has conditions for rate liftoff (i.e. inflation ‘around the middle of the target range’) being met in two years’ time, rather than two and a half.
“Big picture, it is not a drastic shift. The Board is still ‘prepared to be patient’, and still thinks its goal of achieving inflation sustainably within target ‘will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently’.”
What is far more remarkable about today's decision is the outright abandonment of the RBA's April 2024 yield target, O'Donaghoe argued.
“At his most recent parliamentary appearance, Governor Lowe indicated this target "will continue to (reinforce) forward guidance over the next few years". That was on 6 August, 88 days ago. And it was only a little over a week ago, on 22 October, that the RBA's dealing room last intervened to defend the target.
“As such, this decision marks one of the most astonishing policy reversals in the almost 30-year history of RBA inflation targeting. And one that, we think, will have lasting implications for the RBA's ability to craft market and community expectations around its policy guidance.”
O'Donaghoe wrapped with “two practical implications, one short term and one long-term”:
• Short term, the market will now test the RBA's resolve on its bond purchase programme. The bank reaffirmed today that it will "continue to purchase government securities at the rate of $4 billion a week until at least mid-February 2022". But that commitment now looks to be at serious risk of being unwound earlier, if data surprises to the upside.
• Long-term, the RBA's foray into yield curve control will probably never be repeated again. It might have been beneficial in the dark covid days of 2020, but today demonstrates how rapidly unfit for purpose such a 'physical' expression of forward rate guidance can become.
Big call and disagree. Guy Debelle will be back buying bonds any time he likes. Any point on the yield curve he likes.