The RBA Unpauses … Again!

The Reserve Bank of Australia (RBA) has done it again! For half a year now, if their interest rate decisions are any indication, policymakers have seemingly been on a quest to defy monetary policy prognosticators. And, in hiking rates Wednesday, they succeeded again—an amusing piece of evidence adding to our view that monetary policy decisions can’t be forecast.^[i]

In April 2023, under the leadership of former Governor Philip Lowe, the RBA paused, defying projections for another rate hike from several financial commentators we follow.^[ii] Changes to its discussion of possible future moves (aka forward guidance) led many observers we follow to project the pause would continue in May, but Lowe surprised again with a hike and warning that more rate hikes “may be required.”^[iii] So when he paused again in July—another surprise to many!—commentators we follow called it a “hawkish pause.”^[iv] Joke being on them as usual, that hawkish pause lasted four months, bridging the switch to new Governor Michele Bullock.^[v]

Bullock extended the pause at her first meeting in October, and whilst she maintained the “may be required” line about future rate hikes, four meetings with no action gave many commentators we follow the impression the RBA was done.^[vi] Surprise! They hiked Wednesday, bringing the Cash Rate to 4.35%.^[vii]

Exhibit 1: Pauses, by Definition, Aren’t Permanent

Source: FactSet, as of 8/11/2023. RBA Cash Rate, 31/3/2022 – 8/11/2023.

Naturally, this triggered commentators we follow to again speculate over whether the US Federal Reserve (Fed), European Central Bank (ECB) and Bank of England (BoE) might soon end their own pauses. In our view, such speculation is fruitless. Like the RBA, policymakers in the US, eurozone and UK will do what they do when they do it, and if we take them at their word, it will all be data-dependent. Consider Bullock’s new forward guidance: “Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks.”^[viii]

In our view, those are big unknowns! Even having perfect foreknowledge of every economic indicator probably wouldn’t help, since policymakers’ qualitative assessments factor in. In our view, predicting how disparate groups of people will interpret a broad range of (unknowable) economic data and how their debates will go is impossible. We don’t think it is a market function that you can reasonably assign probabilities to. It is all sheer guesswork, in our view.

Thankfully, we still don’t think predicting monetary policy is necessary for investors. Though we see regular coverage in great detail as if it were make or break, monetary policy is just one variable affecting the economy, which our research finds is just one driver affecting stocks (along with politics and sentiment, in our view). Furthermore, we (and many other economists) find it hits the economy at a long and variable lag, which we think gives investors plenty of time to weigh monetary policymakers’ decisions and their likely eventual impact after the fact.

If you find the cottage industry of monetary policy watchers entertaining, by all means, indulge yourself! But we wouldn’t presume any of it is necessary for an investing edge. After all, Australian stocks are up in Australian dollars since the RBA’s first hike in May 2022—as are UK stocks in pounds since the BoE started hiking.^[ix] Whilst monetary policymakers’ big reversal on inflation may have surprised stocks some in the early days of this tightening cycle last year, hikes don’t seem to sway markets much these days. Even when they defy what prognosticators we follow project.