Macquarie has reiterated the points I made in my note below regarding the uncertainty surrounding monetary policy. They also confirm my argument that the RBA's approach to policy has shifted quite materially to place greater weight on their forecasting framework:
"[I]n the past the RBA Governor has argued that "monetary policy is most effective when actions are seen to be consistent with the factual evidence available on the economy, a sensible assessment about future risks, and a framework that has a clear medium-term objective for policy". And the question has to be asked whether the decision to hike rates today -- after inflation has fallen to its lowest level in 5 years -- is consistent with the factual evidence available on the economy.
Moreover, it was certainly very brave to hike rates in the shadow of the upcoming Federal Reserve meeting. Somewhat predictably, the A$ surged back towards parity with the US$ immediately after the RBA's decision. In the media release, the RBA does acknowledge the "significant appreciation" of the A$ and says that it will help to contain inflationary pressures. But despite the A$ being much stronger than the RBA thought in August -- and the fact that Q3 inflation was weaker than they thought, they then maintain that the inflation outlook "is largely unchanged from the Bank's earlier forecasts."
In our view, this is the key take-out from the RBA's decision to hike rates today. More than before, policy is being driven by the RBA's forecasts for the economy, rather than what is actually occurring. Now, from a theoretical perspective, this is absolutely appropriate given the long lags of monetary policy. But if the RBA's forecasts are wrong, then it means that the current setting of monetary policy can diverge quite significantly from the appropriate setting. And by setting policy on the assumption that the economy will be very strong, it inevitably means that most of the the risks are firmly skewed to the downside.
The other factor for the RBA is the decision of at least one commercial bank to increase mortgage rates by 45bps rather than 25bps. This raises the question of whether the RBA has actually got the "modest" tightening that it was seeking."
