Australia’s Central Bank Pauses … Again

The Reserve Bank of Australia (RBA) continued its game of “Red Light, Green Light” this week, pausing rate hikes for the second time this year. The prior pause, in April, came with a statement implying policymakers were less keen on hiking looking forward, teeing up surprise from people who take policymakers at their word when tightening resumed in May and June. Those hikes prompted a big what will they do next guessing game, which continued after Tuesday’s announcement. But don’t bother hunting for clues. We think this is a fruitless endeavor, and not just because stocks have long since moved on.

When we covered June’s hike, we poked a bit of fun at the masses who were reading into minor tweaks in RBA Governor Philip Lowe’s statements explaining the bank’s decisions. March’s statement that more rate hikes “will be needed” made April’s pause a surprise. After all, the same language in February’s statement had preceded March’s hike. April’s statement watered that down a bit, saying more hikes “may well be needed,” fueling the notion that more tightening was off the table since it was no longer for-sure necessary. That rendered May’s hike a shocker, and the seeming U-turn plus the language tweak saying additional hikes “may be required” added more question marks. June’s hike, which came with the very same guidance, extended those. And now, another pause.

Amusingly, people really latched onto the guidance this time, repeating the carried-over “some further tightening of monetary policy may be required” bit as if it were some new revelation about the bank’s thinking and not more of the same practice that sideswiped many investors several times this year already. Headlines called it a “hawkish pause,” seemingly not realizing the phrase was copy/pasted from May and June. That phrase has now preceded a hike and a pause, which we think makes it rather silly to draw big conclusions from it now. It isn’t clear or predictive, just boiler-plate obfuscation.

We suggest taking a step back. Rather than get hung up on the latest policy wiggles and verbiage, look over the whole tightening cycle and see if there is any evidence stocks hinge on the RBA’s decisions. We don’t think there is. The RBA has hiked 12 times since May 2022. As Exhibit 1 shows, the MSCI Australia Index participated in the global downturn as the RBA got going last year, but it bottomed with global stocks in October and was back at all-time highs this January. The volatility since seems tied more to the country’s heavy commodity exposure and relative dearth of Tech stocks than market sensitivity to rate hikes, which continued throughout Australian stocks’ swift rebound.

Exhibit 1: Rate Hikes and Aussie Stocks From US Investors’ Perspective

Source: FactSet, as of 7/5/2023. MSCI Australia Index returns with net dividends in USD, 4/30/2022 – 7/5/2023.

Even this picture doesn’t tell the full story, as currency swings add some skew. In Australian dollars, last year’s decline was shorter, bottoming in June, and returns from the first hike are nicely positive.

Exhibit 2: Rate Hikes and Aussie Stocks From Aussie Investors’ Perspective

Source: FactSet, as of 7/5/2023. MSCI Australia Index total returns in AUD, 4/30/2022 – 7/5/2023.

So no, we don’t think you can foretell what the RBA will do next. Nor does it seem to matter all that much unless they do something truly shocking—not hitting the “red light” for a month or “green lighting” another hike or two. Its benchmark rate is now at 4.1%. Functionally, there is little difference between that and the 4.6% investors have now penciled in by yearend. Banks still aren’t passing all of the rate hikes on to savers, and mortgages scheduled to shift from fixed to floating-rate are already slated for sizable increases. A half point or so doesn’t make much difference in the grand scheme of things, and rate hike expectations are already much milder than they were this time last year. And most importantly, stocks have already shown the RBA isn’t a swing factor. We doubt it suddenly becomes one.