Big Bad Bassanese (aka 'B-cubed') has a terrific column in the AFR today saying pretty much everything I would have said on the subject of tomorrow's RBA Board meeting. It is good to see that crucial policy topics that I have been writing about for months now, such as the question of the RBA's inflation-fighting credibility, the conflicts created by its dovish Board (with strong representation from rates and currency-afflicted sectors of the economy), and the fact that financial markets don't seem to believe the Bank's hawkish rhetoric (the risk is that the lay public will be next), are starting to get some traction in media land. I will leave it to B-cubed to set the scene for you:
"Is this one of those times when the Reserve Bank of Australia decides to shock markets? Traders certainly seem to be asking for it, as they’ve largely turned up their noses at the bank’s dark mutterings on the interest rate outlook in recent weeks. Indeed, despite the very hawkish rhetoric from the bank over the past month...markets attribute a mere 13 per cent chance to a rate increase at the RBA’s policy meeting tomorrow...
The biggest insult to the RBA is that the markets are pricing only one 25-basis point interest rate increase over the coming 12 months – despite the RBA’s warning in its latest Statement on Monetary Policy that more aggressive policy tightening than this will be required to keep inflation in check.
In short, the markets either reckon the RBA is dead wrong on the economic outlook, or is not as much of an anti-inflation hawk as it makes out. Nothing less than the RBA’s credibility is on the line. Are you, governor Glenn Stevens, really as tough as you make out? Or will the pleadings of the non-mining corporate titans that sit on the RBA’s board cause you to hold off raising interest rates? If you decide to hold off for a month or two longer, what exactly are you waiting for?
To my mind, if the RBA is really as forward looking as it makes out, and still backs its view that global growth will be at an “above average pace” in the next few years, then its latest set of underlying inflation forecasts should compel it to raise interest rates at tomorrow’s policy meeting."
