While it has not always got it right, this RBA takes its communications policy very seriously. The recent appointment of Vanessa Crowe, the former head of PR at the Bank of England, to run the RBA’s media relations is one reflection of this. Governor Stevens’ transformation of the RBA’s governance, transparency and communications approach—including fostering genuine debate at Board level in comparison to his much more controlling predecessor—is another important illustration.
I also believe that the RBA wants to avoid a repeat of the “Shadow Governor syndrome” whereby one journalist (ie, Terry McCrann) obtains mythical status in financial markets, with his every utterance moving them materially. The problem for the RBA is that this can lead to the journalist overplaying his or her hand. It is similar to the RBA’s desire to avoid the financial markets focusing on specific syntax—eg, “for the time being”—which was very clearly replaced by the equally meaningful final sentence in Tuesday’s Statement (ie, every meeting is live).
The most vivid example of the RBA’s recent media “rotation policy” was David Bassannese last week. Two days before the SoMP, Bassannese predicts, without any equivocality, that the RBA would print 3.25% in December 2013. Because of his imperfect track-record in anticipating RBA outcomes, many people ignored him after the initial shock of the report.
The key point that I think folks miss is that the RBA simply cannot afford to irreversibly blow-up its media relationships by misleading contacts. If the RBA words a journalist up, and effectively compels that journalist to communicate a very specific message on their behalf, it is awfully difficult for the Bank to turn 180 degrees and do the complete opposite. The media would lose all faith in the RBA, and much more hesitantly communicate its view of the world, which would in turn make managing inflation expectations more difficult.
McCrann in October last year was different. He had arguably become an issue for the Bank with every article moving interest rate expectations. Whether the Bank had to deliberately head-fake him once is open to question. My own view is that the RBA meant to raise rates in October, but the missing 3x independent directors at that particular Board meeting (critically, one of them was McKibbin), plus some genuine debate led to them to delay until November, which had the helpful ancillary benefit of demonstrating that McCrann cannot always correctly forecast every Board decision before the Board has had the opportunity to meet.
So to the question of a June hike. On Saturday, Fairfax's Peter Martin and News Ltd's David Uren--two experienced journalists with impeccable contacts--independently reported that the RBA would ignore the content of the Federal Budget and hike interest rates in June. Martin stated this categorically--without caveat and condition, which is unusual.
Martin in the SMH/AGE:
“THE Reserve Bank will raise interest rates within weeks of Tuesday's federal budget - regardless of its content… The Reserve has held its official cash rate steady at 4.75 per cent since Melbourne Cup Day last year. The next opportunity to move will be at its board meeting on June 7 - four weeks after the budget.”
Uren in The Australian:
“AUSTRALIANS face an interest rate rise as early as next month after the Reserve Bank warned that a tough federal budget next week would not be enough to curb the inflation being driven by accelerating economic growth… Traditionally, the Reserve Bank does not lift rates in June, for fear it will be interpreted as a comment on the inadequacy of the federal budget released in May. The only time it has done so was in June 2002 when rates were returning from very low levels. However, having lifted rates during the 2007 election campaign, governor Glenn Stevens is unlikely to be restrained by political perceptions.”
It is highly unlikely that Martin and Uren would separately report the same thing (which both News Ltd's Terry McCrann and yours truly had forecast a week ago) unless they had been given express instructions by our central bank to do so.
So, in my opinion, barring a bad employment result, and a shock deceleration in wages growth, the RBA is likely to seriously consider going in June. Another reason why they will contemplate going in June is because it is somewhat illogical to do anything else. The RBA has told us that Australia will have a core inflation problem in 2011 given their 3% SoMP forecast. They have further made a very big deal about this core inflation problem deteriorating out to 2013 despite assuming two further hikes, a high exchange rate/TWI, and high oil prices that crimp global growth.
As Glenn Stevens reminded us recently, if the Bank waits until it is absolutely certain it has an inflation problem (eg, in August after the Q2 print), it will almost certainly be too late.
After wording up countless journalists about Australia’s inflation challenges, it does not seem overly credible for the RBA to then wait, say, another full two months (ie, until July) for its next hike. This would be tantamount to saying there is no pressing problem.
Moving in June also reiterates the RBA’s political independence, and is consistent with Stevens’ tendency to break precedent.
Finally, we know that the RBA’s executive thinks that the Government’s fiscal settings have been far too expansionary (via McKibbin and Bloxham), and delaying until July gives the impression that the RBA thought the Budget was doing some of the work for it, which is not something they necessarily want to convey.
