Macquarie has published a note today entitled,
"The central bank that cried wolf", where they argue the RBA has lost credibility with the markets for being too hawkish (ie, broadly as hawkish as yours truly). I don't really think the RBA cares
too much about what financial markets think. And I don't think the RBA would be
overly worried about getting its growth forecasts wrong. In fact, I would have thought the RBA would be positively overjoyed with the impact its relentless jaw-boning has had on consumer and business confidence, the Australian dollar, household spending, and the housing market. There is a case that the Bank's drum-thumping on rates has had much the same impact as if it had actually hiked them. If the Bank thinks there is a risk they have to hike another 2-4 times over the next 1-2 years, then anything that reduces the need for them to do so while having a similar impact on inflation and expectations is a very welcome development indeed (ie, when you consider the Bank's focus on its fragile constituency with the broader community). What
is important to the Bank is getting its inflation forecasts right (or outperforming them). The existing SMP growth forecasts were always too optimistic in the sense they did not embed enough monetary tightening. Notwithstanding this, Macquarie comments:
"When the central bank threatens to hike rates, but doesn’t follow through on those threats, the market naturally starts to get a little blasé about how seriously it should heed the rhetoric. That appears to be the case at present. Second, the RBA argues that tightening is needed now for the forecast boom in investment. But that requires you to be confident in those forecasts of booming growth, and the evidence of the past year highlights that there can be a large gap between those rosy forecasts and the harsh reality."
