If you walk away from a central banker unsure whether they are leaning towards hiking or holding interest rates, it could be said they’ve done a pretty decent job — avoiding accusations of dipping their toe into the dangerous waters of forward guidance. Former Reserve Bank governor Philip Lowe is perhaps the most infamous recent example of what happens when a central banker wades right in.
It’s an accusation you could not level at RBA deputy governor Andrew Hauser after an interview last month, which had many leaving the room slightly unsure whether they’d learned anything new. The conversation between Hauser and ABC business editor Michael Janda offered some candid insights into the RBA’s thinking. However, Hauser hedged his bets enough to leave it ambiguous whether a rate hike was imminent or more of a threat on the horizon.
Inflation Pressures and Market Expectations
If market pricing and consensus forecasts are to be believed, the horizon is closing in, and there will be a rate hike at 2:30pm AEDT this afternoon. In his January sit-down, Hauser was, on one hand, emphatic that inflation above 3 percent was clearly too high. On the other, he made light of the idea that the central bank board had a particular inflation threshold in mind that would prompt it to hike or hold.
He was at pains to emphasize that there was yet to be a great shock — he expected December quarter underlying inflation to come in “just a tiny bit higher” than the RBA’s most recent set of forecasts proffered in November.
In November, the RBA forecast headline inflation to come in at 3.3 percent in the year to the December quarter, while the less volatile trimmed mean measure was forecast at 3.2 percent. In reality, the consumer price index (CPI) rose to 3.6 percent annually for the December quarter, while the trimmed mean came in at 3.4 percent.
Does that constitute “just a tiny bit” above forecasts or “spectacularly high,” to use Hauser’s language? The judgment of financial markets and economists is near universally the latter. As Commonwealth Bank’s chief economist, Luke Yeaman, put it, “the game has now changed — and quickly.”
RBA’s Communication Strategy and Historical Context
There’s been a bit made of the short turnaround time between cutting and hiking, if the RBA lowers the cash rate today, having cut just six months ago in August. Yesterday, Alan Kohler wrote that the average time between a last cut and first hike for the RBA was 10 months — tighter turnarounds have included just four months during the tech-wreck of the early 2000s.
So should the RBA be concerned about the optics of changing tack so rapidly, outside of a major crisis? As CBA’s Yeaman titled his note, “When the facts change, I change my mind,” borrowing the quote attributed to John Maynard Keynes. The RBA has already prepared the public for its shifting stance.
In December, Michele Bullock couldn’t have been clearer about what the RBA wouldn’t be likely to do in 2026, and that was cut rates. Its communications strategy has become much more open in recent years, largely thanks to the advent of regular post-meeting press conferences by the governor.
If the RBA does hike today, you can’t say they didn’t warn us. The move represents a significant shift in policy, reflecting the changing economic landscape.
Economic Forecasts and the Role of the Australian Dollar
It’s worth noting the RBA’s economic forecasts take into account market views on where interest rates are heading. When the central bank’s economists issued their forecasts in November — the ones left in the dust by the recent CPI figures — markets expected interest rate cuts.
As RBA deputy Hauser observed in his interview, even with lower rates factored in, the RBA expected inflation to return to its target band after a short-term spike — by late 2026 on an underlying level, and early 2027 for headline inflation.
With rate cuts now well and truly off the table, could RBA economists conceivably see inflation returning to target — from a higher peak — at current policy settings? We’ll know this afternoon, when the board delivers its decision, and the central bank puts out its updated forecasts, in its quarterly Statement on Monetary Policy.
Meanwhile, another factor playing out is the rising Australian dollar. As the greenback has been walloped, the Aussie has risen to three-year highs and is up against a basket of currencies — which, if it lasts, would make the goods we import cheaper.
Donald Trump recently said of the tumbling US dollar, “I think it’s great,” so it’s unlikely we’ll see the tide turn on our currency anytime soon. It’s one force other than the RBA’s cash rate that could help put downward pressure on prices.
As the RBA prepares to make its decision, the implications of its choice will reverberate through markets and households alike, shaping the economic landscape for months to come.
