The RBA likely believes it won’t need to hike rates again – but the worst thing it could do is say that out loud

The Australia" class="entity-link entity-organization" data-entity-id="3046" data-entity-type="organization">Reserve Bank of Australia board held rates at 4.35% on Tuesday, before the RBA’s governor Michele Bullock said ‘inflation remains too high’. Photograph: Mark Baker/AP View image in fullscreen The Australia" class="entity-link entity-organization" data-entity-id="3046" data-entity-type="organization">Reserve Bank of Australia board held rates at 4.35% on Tuesday, before the RBA’s governor Michele Bullock said ‘inflation remains too high’. Photograph: Mark Baker/AP Analysis The RBA likely believes it won’t need to hike rates again – but the worst thing it could do is say that out loud Patrick Commins Economics editor When it comes to the Reserve Bank, there’s a whiff of a parent making a threat they have no intention of carrying out Get our breaking news email, free app or daily news podcast Every parent makes threats in an effort to get their kids to behave – and every parent hopes they won’t have to follow through. Some (most?) parents even make threats they have zero intention of carrying out. There’s more than a whiff of this strategy coming through in the Reserve Bank’s communication. The RBA board in a unanimous decision held rates at 4.35% on Tuesday, as was widely anticipated. The last time they hiked rates was in May, so about three months ago. Lots of water has flowed under the bridge during that relatively brief time, but the central bank’s latest forecasts show inflation still getting back to around the RBA’s 2.5% target in about a year’s time. The impact of the Middle East and high fuel prices has not proved as immediately inflationary as feared, although the lingering effects of the global oil shock could take 1-2 years to fully flow through the system. And after three back-to-back rate hikes earlier in the year, “the economy appears to be slowing as expected”, the RBA board said in its statement. Even the housing downturn is leaning against the need for another rate hike (although what’s happening in the property market “is not the main game” and won’t stop them hiking again if they need to). But in her press conference, Michele Bullock did not sound like a central bank governor who believes things are breaking her way. “inflation remains too high, and the board remains concerned about the upside risks,” Bullock told journalists after the rate announcement. “We’ve already raised three times, and we will go again if we need to.” Bullock even delivered a rare personal view on what she thought would happen. “And I think, personally, that it’s quite possible we might need to go, but we’ll wait and see what the data tells us,” she said. View image in fullscreen The RBA’s governor Michele Bullock speaks during a press conference in Sydney. Photograph: Hollie Adams/Reuters Bullock and the RBA’s rate-setting board really, really want us to know they are prepared to hike again. Again, this is despite the fact that inflation has come in lower than expected since the board last met, and unemployment a little higher. Yet, if anything, Bullock’s warnings have become even more strident. Why? Because at this point in the cycle, and despite their protestations, it’s highly likely that the board hopes and believes it won’t need to hike again. But the worst thing bank officials can do is say that out loud. As Bullock said: “It’s important people believe that we will act if we need to.” That heightened expectation of another rate hike can do a lot of the RBA’s work for it. Look at financial markets: the implied chance of another cash rate increase by the end of this year jumped from 53% before the decision, to 67% by the time Bullock had wrapped up her press conference. This is the real power of central bank “jawboning”, as we used to call it. Bullock and her fellow board members will be hoping inflation behaves before we all stop believing they will follow through on their threats. Explore more on these topics Australia" class="entity-link entity-organization" data-entity-id="3046" data-entity-type="organization">Reserve Bank of Australia Australian economy interest rates inflation analysis Share Reuse this content