Interest rates: Reserve Bank’s credibility at risk as world’s central banks face political interference

Following the release of its May board statement, analysts proclaimed that the central bank had retained its “neutral” posture and not considered lifting rates despite a 96th percentile upsideIn a note published after the meeting, yet prior to governor Michele Bullock’s press conference, Goldman Sachs said the board had “reiterated the RBA’s neutral forward guidance”.

“Bullock explicitly disclosed the board HAD discussed a rate hike. She – quite deliberately – did not add, that it had also discussed a rate cut,” McCrann said.As Coolabah’s chief macro strategist, Kieran Davies, put it: “Martin Place delivered conflicting messages on monetary policy, retaining a neutral policy bias even as the board discussed raising rates for the first time since February.”

Her predecessor, Phil Lowe, acknowledged the RBA was “taking a bit more time than some other countries , on the basis that doing so can preserve some of the gains in the labour market”.. But with labour-cost-fuelled services inflation running at 6 to 7 per cent, the only credible way to normalise inflation is by attenuating wage growth through higher unemployment.

There was nonetheless also a suspicion that Martin Place might try to fudge the forecasts to avoid this outcome. “This seems something of a stretch, partly because the RBA’s own modelling points to a long lag between higher interest rates and inflation, while the RBA simultaneously forecast a slower rise in the unemployment rate to a marginally lower peak of 4.3 per cent despite a higher assumed cash rate.”

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