Terry explains RBA’s May statement

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RBA Shadow Gov. Terry McCrann has published (what looks to be) a backgrounded story explaining the RBA’s post meeting statement.

Good. Thanks Terry / RBA; we need it.

Terry explains that: “The RBA will cut its official interest rate if the jobless rate does not fall; and it will need to start falling pretty quickly or at least show clear signs that it will fall.“

That’s confusing, as the RBA told us today that the “unemployment rate has been broadly steady at around 5 per cent over this time and is expected to remain around this level over the next year or so, before declining a little to 4¾ per cent in 2021.”

So the RBA has told Terry that if the unemployment rate is stable over the next few months, they’ll cut the cash rate.  I suppose that this is the ordinary meaning of the RBA’s comment that “there was still spare capacity in the economy and that a further improvement in the labour market was likely to be needed for inflation to be consistent with the target”.

However, the RBA’s time line for improvement appears to be short, and their threshold so low it’s meaningless.

Terry writes that the only way we’re going to make it to August with a 1.5% cash rate is if the unemployment rate falls.

If we got to the August meeting and there’d been no rate cut, the inflation numbers and the new forecasts would not trigger one at the August meeting, because the jobless rate must have fallen below 5 per cent. And I do not mean just to 4.9 per cent on dodgy detail.”

And Terry adds that the RBA could cut as soon as June: “If we got a ‘bad’ number — say, the jobless rate kicking up to 5.2 per cent or more or full-time employment falling statistically significantly, we would get a rate cut at the June meeting.”

How you can claim there’s any signal for a 5.2% unemployment rate in June I don’t know.  The unemployment rate was 5.048% in April, the 95% confidence interval on the unemployment rate is ~40bps, and the average move has been ~10bps (up or down) each month for the last two years. So you couldn’t say for sure that the unemployment rate was meaningfully different from 5% just because it printed at 5.2% in April.

Anyhow, a stable unemployment rate, at 5%, is exactly what the RBA forecast. So it follows, from Terry’s claim that the RBA will cut before August if the unemployment rate does not fall, that the RBA expect to cut the cash rate in either June or July.

Thinking about the 7 May meeting, that means the RBA held their policy rate stable, despite producing forecasts that justify a rate cut – and that the RBA intend to deliver a rate cut if those forecasts are met.

Confused? Me too. 

I know what you’re thinking – perhaps politics played a part? In case you’re worried that politics infected the decision, Terry explained:  

“If the RBA — that’s governor, his executive team and his board, which is not just a formalising rubber stamp — had believed an immediate cut, even just 12 days out from the election, was necessary, they would have cut”.

So that’s that then.  The RBA left the cash rate on hold today, despite it not being justified by their forecasts, because they wanted to give the data a sporting chance to beat the economists.


  1. funny to see tezza trying to retort my point about the rba board being a “rubber stamp”. i deliberately threw that out there in my column on fri/sat because i wanted the board to exercise as much influence as possible to delay a cut. i think the thing missing from your analysis, which is theoretically flawless (the RBA should have cut if they are an inflation-targeter), is the simple practicality that it was obviously very inconvenient to cut 10 days before an election. when there is zero difference between cutting in may, june or july, you cut later simply because the tail risk of a may cut becoming a dominant narrative in the election and influencing the election outcome, and thereafter forever tarnishing lowe’s legacy, is not worth it. i think you missed these basic practical considerations. but i think the miss is reasonable, because the rba is not meant to be worried about politics and should have cut in may, all else being equal. further, i think that if your base-line was the rba’s past behaviours, you forecast a cut in may. so this was a completely explicable miss. i would not be at all surprised if the RBA exec recommended a cut in may, but noted they could defer the decision to june, july or aug, and the board then pushed hard to defer. there are a lot of liberal appointees on that board, and blind freddy can see that the sensible, lowest risk decision for the rba was to delay. i was very torn on this meeting because i could not decide whether the inflation targeter would prevail over the practical desire to insulate the rba from politics. and i think the rba is still an inflation targeter…

    1. That makes a tonne of sense. And for sure it doesn’t matter much which month they cut in terms of the impact on the economy. It is a tortured stance for the board.

  2. Terry does not have a pipeline to anyone in the RBA. That ended when SuperMac left.

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