The RBA Unpauses … Again!

The Reserve Bank of Australia (RBA) has done it again! For half a year now, policymakers have seemingly been on a quest to put egg on the faces of monetary policy prognosticators. And, in hiking rates Wednesday, they succeeded again—an amusing reminder that central bank decisions can’t be forecast.

In April 2023, under the leadership of former Governor Philip Lowe, the RBA paused, defying expectations for a hike. Changes to its forward guidance led observers to expect the pause to continue in May, but Lowe surprised again with a hike and warning that more rate hikes “may be required.” So when he paused again in July—another surprise!—pundits called it a “hawkish pause.” Joke being on them as usual, that hawkish pause lasted four months, bridging the switch to new Governor Michele Bullock.

Bullock extended the pause at her first meeting in October, and while she maintained the “may be required” line about future rate hikes, four meetings with no action gave people the impression the RBA was done. Surprise! They hiked today, bringing the Cash Rate to 4.35%.

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

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

Naturally, this triggered a fresh round of speculation over whether the Fed, ECB and 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.”

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

Thankfully, predicting monetary policy still isn’t necessary for investors. Though covered regularly in great detail as if it were make or break, monetary policy is just one variable affecting the economy, which is just one driver affecting stocks (along with politics and sentiment). It also hits the economy at a long and variable lag, giving investors plenty of time to weigh central banks’ decisions and their likely eventual impact after the fact.

If you find the cottage industry of Fed watchers entertaining, by all means, indulge yourself! But don’t presume any of it is necessary for an investing edge. After all, Australian stocks are up since the RBA’s first hike in May 2022—as are US stocks since the Fed started hiking. While central bankers’ U-turn on inflation may have surprised stocks some in the early days of this tightening cycle, hikes don’t seem to sway markets much these days. Even when they defy what prognosticators project.