If rate hikes are on autopilot, just say so

Are robots coming for jobs at central banks, too? Despite protestations to the contrary, the course of interest rates looks to be on autopilot in many economies. The highest inflation in a generation means officials are striding with deliberation toward a pronounced slowdown, if not global recession. If a slump is in the offing, it will be one that’s front-loaded.
The Reserve Bank of Australia, which raised its benchmark rate by another 50 basis points, insisted that borrowing costs aren’t on a “pre set path.” The RBA used the same language last month, though minutes of the August board meeting suggested no other outcome was considered. Now, after four consecutive hikes of half-a-percentage point, it’s hard to accept assurances about variety until some is delivered.
Yes, at some point the pace of increases has to slow down. With the main rate now at 2.35% — the highest since 2015 — the RBA is within striking distance of neutral, a vaguely defined place that neither stimulates nor brakes the economy. Ordinarily, that would be a good opportunity to take a breath, even if it’s not a deep one, and consider how much more needs to be done. But with inflation well above the bank’s 2% to 3% target, scaling down now to 25-basis-point hikes — the increment the RBA said in May was “business as usual” — would require courage. JPMorgan Chase & Co. predicts another 50-basis-point step in October, followed by a quarter-point move in November and then an “extended pause.”
There was a time when new language in monetary communications could be taken to the bank, literally. That was before the pandemic, which prompted a rush to zero rates — or below — and huge bond-buying. Things were moving so fast, it was imprudent to take as gospel what officials said the week before, let alone a month earlier. Now, in the dash to catch up with galloping inflation, we must again set aside what would have normally been of significant import.
Perhaps one thing central banks now truly are is data-dependent, a stance often mouthed but not always adhered to. The figure that’s first among equals now is inflation. The news isn’t encouraging for the RBA. Consumer prices rose 6.1% last quarter. Inflation is forecast to peak at just under 8% later this year. Apart from that, the economy has exhibited reasonable health. Retail sales surged in July, while the unemployment rate fell to 3.4%. That doesn’t mean everything is rosy. The economy lost jobs that month, confounding expectations of solid gains. The property market is fragile. Most Aussie mortgages have flexible rates, which means that as official rates climb, so does the cost of repaying a loan.
Australia also faces an unfavorable international environment. As with past rate decisions, the central bank ticked off things going wrong beyond local shores: Decelerating world growth, tighter global monetary policy, Russia’s invasion of Ukraine and constraints on Chinese growth. Asia’s dominant economy — and Australia’s largest trading partner — is struggling amid a crisis in the real-estate industry and a Covid-zero policy that locks down large cities. China is the only nation of real consequence that is actively contemplating new easing steps.
Adding to the morass, the RBA appears haunted by a spectacular communications failure. As late as the end of last year, the bank’s guidance was that rates might not climb until 2024, a ludicrous proposition in hindsight even if the thinking behind it — that the inflation spike would be short-lived — was in the global mainstream.
—Bloomberg