RBA governor’s dovish stance on interest rates sparks debate among analysts

By Maria Irene

Analysts are buzzing with opinions following Reserve Bank of Australia (RBA) Governor Michele Bullock’s dovish approach to rising interest rates. As the Australian economy continues to grapple with a precarious inflation rate of 5.4%, market players seem torn between advocating for higher rates and endorsing the RBA’s caution.

Warren Hogan, a renowned Australian macroeconomist, underscores the dilemma faced by the RBA and the Treasurer. He warns that the Treasurer’s attempts to influence the RBA could undermine his own credibility, especially given the prevailing stronger labour market and surging property prices. He speculates that the RBA may make ‘material’ changes to their inflation forecasts, in light of these external pressures.

Kieran Davies of Coolabah Capital Investments believes that the RBA’s historically inaccurate forecasting should necessitate a change in its core inflation forecast for 2025 to 3% or higher. According to Davies, the RBA’s inflation forecast miss in Q3 is the third largest since 1991, which raises questions about the bank’s predictive efficacy. Davies suggests that the November Statement on Monetary Policy could project a slower return to the inflation target, revising the 2025 inflation forecast to between 3.0 and 3.1%.

Reacting to Davies, economist Grant Coble-Neal questions the forecasting model itself. He wonders if the model is too reactive, effectively driving while only looking in the rear-view mirror.

Christopher Joye, Portfolio Manager at Coolabah Capital and AFR Contributing Editor, interprets the RBA’s dovish stance as a deliberate avoidance of any hawkish implication. Joye points out that Bullock could have confirmed the 80% market probability for a November rate hike but opted not to. Instead, she congratulated the Feds on fiscal policy, leaving market players guessing about the future direction of interest rates.

When it comes to international comparison, the discrepancy between the U.S and Australian economic metrics is glaring. While the U.S sports a 3.7% inflation rate and a 5.5% interest rate, Australia lags with a negative real interest rate of -1.3%. In real terms, U.S interest rates are 3.1% higher than those in Australia.

Stephen Koukoulas, Prime Minister Albanese’s advisor, offers a different perspective. He cites the Bank of Canada’s decision to hold rates and suggests that ‘most sensible folk’ are wary of damaging the economy with hasty rate hikes. Koukoulas dismisses the urgency, pointing out that although the economy is slowing and inflation is falling, it’s not enough to warrant an abrupt policy shift.

Governor Bullock’s recent Senate estimates hearing also gave few clues. While she acknowledged a “little higher” inflation than expected, she didn’t indicate an imminent rate hike. This has led some economists to adjust their predictions. For instance, both the Commonwealth Bank and ANZ, who had previously expected the RBA to hold steady, now anticipate a quarter-percentage-point increase to 4.35%.

As the November meeting of the RBA looms, the market is rife with speculation and contrasting opinions on what the central bank’s next move should be. What is clear is that the RBA Governor’s dovish stance has done little to quell the debate or give definitive direction, leaving analysts, investors, and the broader Australian community in a state of anticipation.

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