Central banks are unlikely to be adamant when suspending rate hikes in the coming months. It may only become clear afterwards that the hold button was pressed. For good reason: inflation is falling, although well above target. Global growth is slowing, but less than previously feared. A single juicy piece of data, such as a high number of jobs or prices that seem a bit too sticky, can sway sentiment on the future path of borrowing costs. Will it be another nudge or two higher, maybe even three?
The pitfalls of trying to identify the onset of a pause surfaced last week when the Reserve Bank of Australia raised its key rate by a quarter point, as expected by a majority of economists. The sting was in the accompanying statement. The words were just hawkish enough to put away predictions of an upcoming break by a month or two – and push the Aussie dollar higher and bonds lower. Governor Philip Lowe dropped last year’s qualifier that the bank was not on a predefined path and said further hikes would be needed.
It wasn’t so much that Lowe indicated there was still work to be done that unsettled investors. It is far too early to say everything is clear on inflation, especially as the bank is still under fire for suggesting late last year that rates might not have no need to increase before 2024. What stands out from the RBA’s comment is the absence of any clear indication that a break was on the table. Records of the RBA’s deliberations at the end of 2022 showed that a suspension was among the options considered by the board. “Our job is to call what we think the RBA will do and not what we think it should do,” wrote Commonwealth Bank of Australia’s Gareth Aird, which now sees the key rate pushed to 3.85. %, against 3.35%. He said the policy was heading “into deeply restrictive territory”. The risks of error multiply.
By the way, a sabbatical is not a guarantee of rest. Bank of Canada Governor Tiff Macklem declared a conditional break last month and is now defending the middle ground against hawks and doves. Macklem thinks it may take 18 to 24 months to see the full effects of higher borrowing costs. “We need to pause rate hikes before we slow the economy and inflation too much,” he told a business audience. “We shouldn’t keep raising rates until inflation is back to 2%.” It’s been a while since a central banker publicly worried about the risk of inflation falling too far.
The folks at the Bank of Korea would do well to review Macklem’s address. Early to raise rates in 2021, the BOK was widely seen as ready to skip a hike this month. Then last week’s data showed prices jumped in January, keeping the prospect of further tightening alive. The break may still happen, with cuts by the end of the year, but there is a slight element of doubt. Governor Rhee Chang-yong warned in January that markets should not rush to declare the bull cycle over. . If troublesome data starts pouring in, the two will be under pressure to review it. The obvious criticism: Why did you risk doing too little rather than too much?
Risk management just isn’t what it used to be. In his first speech as chairman of the Federal Reserve at the institution’s annual retreat in Jackson Hole in 2018, Jerome Powell spent a lot of time extolling Alan Greenspan’s approach. In particular, he liked the maestro’s habit in the 1990s of delaying little by little until the choices became clearer. Then it came down to whether – and when – pausing was safer than sitting still. Powell characterized the modus operandi of that time as follows: “The committee converged on a risk management strategy that can be summed up in a simple request: ‘Let’s wait for one more meeting; if there are clearer signs of inflation, we will start to tighten. The situation could now be presented as the reverse: wait for the break until you are sure that inflation is on the run and will not seize up again – and embarrass you.
The process has started, but is not yet completely finished. Like rummaging through a box long after the movers have unloaded your bulky furniture. The break is here somewhere. Just one more box.
More from Bloomberg Opinion:
• Let’s be big enough to accept this economic gift: Daniel Moss
• The pivot of the Fed is dead. Long live the Fed Pirouette: Robert Burgess
• Can’t give up your low mortgage rate? Renovate! : Alexis Leondis
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was Bloomberg News’ economics editor.
More stories like this are available at bloomberg.com/opinion