MNI: Behind-Curve RBA To Wait Till May Before Hike-Ex Staffers

The Reserve Bank of Australia is likely to wait until May before lifting its cash rate from 3.85%, but could consider a larger 50-basis-point increase if the Iran conflict pushes oil prices higher and feeds into first-quarter CPI, especially with inflation already above the target band, former officials told MNI, warning that repeated forecast misses combined with an energy shock risk de-anchoring inflation expectations.

“If the RBA is serious about getting on top of inflation in this supply shock … If you don’t do enough now and inflation increases by more, then you’re going to need to do more down the track,” said Mariano Kulish, a University of Sydney professor and former senior RBA manager. He criticised what he described as the Bank’s narrow path strategy, arguing it had resulted in overly dovish settings.

Kulish said policymakers would likely wait for Q1 CPI data, due April 29, and remain on hold at the March 17 meeting. With inflation still above target and unemployment around 4%—close to estimates of full employment—he argued the Bank had scope to act more decisively with a 50bp move. Markets have priced in a 20% chance of a move in March and a 75% probability of a 4% cash rate by the May meeting.

Restoring credibility after the inflation overshoot should be a priority, even if that entails some labour market weakness, Kulish said. Supply shocks imply a trade-off between inflation and unemployment, and that holds in practice as well as in theory, he added. 

"But [the RBA]'s whole language trying to walk the fine path while preserving the labour market conveyed the idea that they could bring inflation back down without the labour market feeling anything in the process, and the end result of that is policy that is more dovish than what it should have been and the end result is that now we still have inflation above the band, not where you want it ideally when you get new shocks like this."

Luke Hartigan, a University of Sydney lecturer and former RBA economist, said an oil shock would initially lift CPI but ultimately weigh on global growth, complicating the outlook. While higher energy prices would add to headline inflation, indirect effects may be limited, and slower growth in key trading partners such as China, Japan and South Korea could dampen demand for Australian exports.

Hartigan noted that higher LNG prices, often linked to oil benchmarks, could boost Australia’s terms of trade, partially offsetting weaker global activity. Still, domestic supply constraints mean inflation pressures have not fully dissipated and a tightening bias remains appropriate, though the timing of any move is less certain.

COMMUNICATION MISSES

Hartigan said recent remarks from senior RBA leaders appeared inconsistent, particularly around labour market conditions and unobservable “star” variables such as the neutral rate and NAIRU, making it harder for markets to infer the Bank’s reaction function. Greater clarity on how policymakers balance their inflation objective against employment considerations would help anchor expectations, especially given projections showng inflation returning to target only gradually over the next year. (See MNI: RBA Likely To Hike, Labour Market To Fuel Caution)

He pointed to comments last year by Deputy Governor Andrew Hauser that the Bank was less reliant on economic models, arguing that misjudgments about NAIRU and the neutral rate had left policy less restrictive than required. "It seems that this experiment with the board's overriding of the star variables has come back to bite them—they've been proven wrong," he said. "They thought NAIRU was lower and that the neutral rate was lower, and interest rates weren't as restrictive as they should have been."

Kulish suggested incoming board member Bruce Preston, whose term began on March 1, could tilt deliberations in a more hawkish direction, citing his work on anchoring inflation expectations. Persistent upside surprises risk gradually feeding into expectations, he said, reinforcing the case for a firmer response.