Why the RBA has been letting us down on cash rate calls

Costly delays on key cash rate decisions have raised questions as to whether the Reserve Bank should have spoken up sooner about substandard data.

The bank’s rate cut cycle was cut short in a controversial decision in early July, mainly thanks to its concerns around the inadequacy of the Australian Bureau of Statistics’ (ABS) monthly inflation data.

In recent weeks, governor Michele Bullock has reiterated the monthly Consumer Price Index indicator cannot be relied upon to accurately measure Australia’s inflationary path.

Certain items are viewed as too volatile in price or too prone to fluctuation to be included in the data. The variance from month to month and subsequent distortion of overall figures has become too much for the bank, which wants certainty from monthly data.

Trimmed mean inflation has now come in between 2-3% for two consecutive quarters, strengthening the case for another rate cut and meaning lower mortgage rates are likely just around the corner.

Money market pricing implies near certainty for cut in August – perhaps even an 0.5% ‘double cut’ – though Ms Bullock’s cautious approach this year doesn’t guarantee anything.

This was the ultimate takeaway from July’s surprise decision, which has birthed a new era for the data the RBA relies on to make its decisions.

“The RBA has expressed a pretty strong preference for the quarterly inflation data over the monthly,” REA Group executive manager of economics Angus Moore said. “There are a few reasons for that, but key among them is that the monthly inflation measure is pretty new and is still experimental.”

A new and complete monthly CPI will be introduced later this year, allowing for cash rate decisions to be more timely and informed.

The new data, which will be introduced from November, will likely go a long way to put a plug in the Reserve Bank’s conservatism.

The bank’s concerns that it cannot pinpoint where inflation is in real time has not been without criticism.

Both the European Central Bank and the Bank of England (BoE), as well as the New Zealand, Canadian and Swiss central banks, are predominantly reliant on monthly data in making decisions.

So, what’s wrong with the monthly data the RBA received from the ABS?

Mr Moore explains that what the monthly indicator leaves out in its measuring is crucial and always covered by the monthly data.

“That’s a bit different from most of the other countries,” he adds. “The vast majority have an official – i.e. not an experimental – monthly CPI measure.”

The Reserve Bank has been talking a big game about inflation needing to “return sustainably” to its target range of 2–3%. Now, we’ve already seen some progress on that front — March inflation numbers were encouraging and June’s data has confirmed the trend rather than derailed it.

The shift to a more complete monthly CPI release comes amid some calls from policymakers, especially in the RBA, for faster and more real time data on inflation. 

The ABS has now confirmed Australia’s new, complete monthly CPI inflation reading will be introduced from November.

The new approach will mark a transition for Australian CPI data to a monthly format from a quarterly format, the ABS said in a statement, and will also bring the country’s inflation reporting standards in line with its G20 peers. 

“The transition to a complete, internationally comparable monthly CPI as Australia’s primary measure of headline inflation will provide better information for monetary and fiscal policy decisions that have a direct impact on all Australians,” statistician David Gruen said in a statement.

RBA deputy governor Andrew Hauser was positive on the news of the new measure, reflecting last week on his move to Australia from working at the BoE.  

“It’s fantastic news” he said. “I had to adjust when I came from the UK to a world in which you only really know where inflation is once a quarter and that’s quite challenging when it’s your main target variable.

“We should give credit to the ABS for doing it.”

Mr Hauser said the bank “would have to go on a bit of learning journey” with the new ABS approach.

“The seasonality of the measure will be something that we will have to get to understand in the first period,” he said. “Some of the underlying data has only been gathered since last year and you can’t possibly know the seasonal pattern of a new series we don’t even have a couple of years’ data for.”

Despite this, Mr Hauser said better and more frequent information is “unambiguously good news”.

Waiting for the new measure has been costly for mortgage holders, however. The RBA delayed a decision to cut interest rates last month, citing the need to see the June quarter monthly data. 

If 0.25% had been cut off the rate in July, a homeowner with a $500,000 mortgage could already be saving around $80 a month.

The bank will make its next decision on rates on 12 August.

This article first appeared on Mortgage Choice and has been republished with permission.

The post Why the RBA has been letting us down on cash rate calls appeared first on realestate.com.au.