Has the RBA gone crazy? Or is that just what they want us to think?
Well, who saw that coming? 50bps. RBA served up a double-scoop of rate hikes. Throw a little cherry on top why don’t you?
If you didn’t see it coming, don’t worry. Nobody did. When they hiked the cash rate by 50bps up to (a still incredibly low) 0.85% literally nobody in the markets saw it coming.)
And you get the sense that that was kind of the point.
BetaShares chief economist David Bassanese called Tuesday’s move as a decision by the RBA to “inflict shock and awe” on the economy, “no doubt with a view to eliminating any lingering complacency with regard to the inflation outlook”.
“The RBA clearly wants to avoid falling behind the inflation curve and has judged the economy has sufficient underlying resilience and momentum to withstand today’s shock move.”
And this is the thing to remember. Expectations matter. If people expect rates to be higher tomorrow, they start adjusting their spending and investment decisions today.
And that creates an alluring fruit dangling in front of the RBA’s nose. If they can shock and awe everyone in the economy, and everyone then ratchets back their spending in anticipation of higher rates, then they don’t actually have to raise rates at all.
The expectation of higher rates does most of the heavy lifting.
And so we get 50bps last week, and we might we get 50bps next month as well.
At that point, everyone adjusts their expectations and assumes that the RBA had decided to go hard.
But those expectations in and of themselves change the course of the economy. As a result, the RBA then has the luxury of sitting on its hands and watching how things play out.
Smart.
And so what I reckon that means is that a bigger than expected rate hike now actually means the opposite of what most people think it means.
Most people think it means that the RBA has become more aggressive, and we’re going to see more rate hikes than we previously thought.
It could actually be the opposite.
It could be that the RBA has decided to front load all of their hikes in a hope of shocking people. And they’re doing this because they know they don’t really want to raise rates too far.
And so, kinda oddly, bigger hikes now might mean less hikes in the future.
That’d be my guess.
That said, that might be giving the RBA too much credit.
It might equally be the case that they just don’t really know what they’re doing right now because these are such uncertain times.
We’ve never had a massive energy shock coming straight out of a pandemic before. There’s no procedure manual for that one.
So, is the RBA clever or crazy?
We’ll have to see.
JG.