Analysis-RBA's new policy board comes with added unpredictability
By Wayne Cole
SYDNEY (Reuters) -Australia's central bank has a problem communicating that has injected an element of unpredictability into interest rate policy when global uncertainty is already high, and its proving costly for investors.
It all stems from an April shake up at the Reserve Bank of Australia that shifted rate-setting power entirely to a new nine-member Monetary Policy Board.
At just its second meeting in May, the board decided to cut cash rates by a quarter point to 3.85% and sounded more dovish than analysts expected, even briefly considering an easing of 50 basis points given the uncertainty caused by U.S. tariffs.
This, combined with some soft economic data, led investors to wager heavily on another cut in July while a Reuters poll of 37 economists found 31 expected an easing.
Crucially, investors were encouraged to pile into these positions because the RBA did not push back on expectations, as they had often done in the past.
Imagine their surprise, then, when the MPB held rates steady in a rare spilt decision of six to three, leaving many investors with painful losses.
Speaking to the media after the decision, RBA Governor Michele Bullock explained that the bank could no longer offer guidance because the rate decision was up to the board alone and it could not be pre-empted.
Essentially, the RBA had changed the way it communicates to markets, without telling those markets it had changed.
"Since no single MPB member can front-run the whole Board, future inter-meeting communication is unlikely to endorse or push back against market pricing," said Luci Ellis, chief economist at Westpac and a former assistant governor at the RBA.
"This implies that markets will be surprised more often than in countries like the United States, where the central bank puts more weight on avoiding surprising the market."
RBA A MINORITY ON ITS OWN BOARD
Since then, a benign inflation report now has investors equally convinced the MPB will cut rates to 3.60% at its next meeting on August 12, in part on the hope it would not want to shock twice in a row.
Yet the MPB's unusual composition makes for added uncertainty as it has just two RBA officials, along with a top Treasury official and six part-time external members with backgrounds in economics, business and banking. The latter are appointed by the Treasurer of the day with input from the RBA.
Markets have little to no idea what the views of these six are, and that is unlikely to change as there are only vague plans for each to make one public appearance a year.
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