In determining its economic projections, the RBA’s forecast models use a variety of inputs to determine what’s likely to occur, including market pricing for movements in Australia’s cash rate.
Ahead of Tuesday’s meeting, money markets were fully pricing in around 40 basis points of rate cuts by the end of this year, implying the cash rate would be reduced at least once, and likely twice, to a record low of 0.25 per cent over this period.
This easing expectation is priced into other asset classes as well. The Aussie dollar is trading near its lowest levels since the global financial crisis. And equities, despite the coronavirus outbreak, are just 3 per cent below record highs. The S&P/ASX 200 closed up 0.4 per cent on Tuesday at 6,948.7.
Put bluntly, for the RBA to achieve its rosy outlook in the timeframe specified, it will likely have to cut interest rates again. But this is at odds with the optimism expressed in the February policy statement. Nor is it asking the government to turn on the fiscal taps to get the economy moving. “Don’t worry, Josh. It’s all good.”
For anyone who’s been following the RBA in the decade since the GFC, there’s never been anything other than optimism from the board when it comes to its commentary and forecasts.
However, that optimism has not always been replicated in reality.
One look at its track record for forecasting economic growth, unemployment, inflation and wage growth since the GFC reveals it’s been a serial offender in over-promising and under-delivering when it comes to economic outcomes.
It clings on to its optimistic view for as long a possible before eventually acknowledging its policy stance is inappropriate, leading to a string of rate cuts such as those we saw last year. Afterwards, it reverts to an optimistic view and the cycle repeats again.
While clearly not the only factor, the RBA’s reactionary approach helps explain why it hasn’t been able to lift interest rates since late 2010, and why Australia’s cash rate now sits at a record low of 0.75 per cent.
After three rate cuts in 2019, and the surprisingly upbeat tone of the February policy statement, one can’t help but think the pattern of the past decade will soon repeat itself again.