Welcome to the ‘yes, but’ cycle of rate cuts

By Daniel Moss

Three decades ago, economics underwent a revolution that doesn’t get sufficient credit. Instead of shrouding policy shifts in secrecy, central banks began shouting hikes or reductions in interest rates from the rooftops. Moving by stealth in markets was out. Press releases were in. By amplifying their message, officials hoped to steer the public toward their view. With luck, they could also minimise financial ructions.

Today’s crop of policymakers could use some of the same clarity of purpose.

The global economy is on the cusp of a sustained easing, though not necessarily a dramatic sequence of rate cuts. Growth is slowing, but there’s no crisis. Critically, price gains are abating significantly and inflation targets are within sight. This ought to be great news, but officials are having trouble embracing the moment. The legacy of “transitory,” the now infamous word the Federal Reserve used to play down inflation’s climb in 2021, is wreaking havoc. Almost every monetary authority used similar terms.

In a revealing moment during a recent Reserve Bank of Australia media conference, Governor Michele Bullock was asked to compare the RBA's hawkish stance with peer institutions that had trimmed rates. What were they seeing that the RBA, which refuses to countenance an easing, wasn’t? Bullock was defensive. The Bank of Canada, for instance, wasn’t really dovish, merely less hawkish. “They are sort of easing their tightening.” The answer was easily caricatured as hair splitting. Bullock was onto something, nonetheless: It’s very tough to identify turning points. Ease too soon and the risk is that inflation reignites; delay too long and the desired slowdown can become something more sinister.

The reticence is understandable. After the missteps of late 2021, who wants to be the person to pronounce inflation beat? Bullock reiterated the excessive caution in a speech on Thursday. “I know this is not what people want to hear,” she said. “The alternative of persistently high inflation is worse. It hurts everyone.” However, the longer she waits to switch to even a neutral stance, the greater the danger Bullock makes a mistake.

Sadly, the last war is still being fought. The wariness was on display at the Bank of England, whose policy panel lowered rates last week in a 5-4 vote. Unusually, the BOE’s chief economist was on the losing side; Huw Pill cited progress on inflation, but warned “it’s not yet job done.” But surely close enough to warrant some loosening? Inflation is back at the bank’s 2 per cent target after reaching double digits in 2022 and 2023. Governor Andrew Bailey, who cast the deciding ballot, appeared uncomfortable with the victory. There’s no rush for more relief, he stressed.

Even the outliers are stepping on their narrative. In late July, the Bank of Japan surprised by lifting its main rate alongside a plan to halve its bond purchases. Governor Kazuo Ueda came across as hawkish, contributing to a slump in Japanese stocks and a surge in the yen. The upheaval prompted Ueda’s deputy to walk back at least the tone, if not the substance, of the decision just days later. A summary of the bank’s deliberations released on Thursday shows officials didn’t consider their actions a tightening. That works on one level: policy is still very accommodative by global standards. Nuance can get lost amid shock, however.

So we have rate cutters who emphasise how tight they really are, and hikers who stress how loose things really are. Both can be true in a narrow sense while obscuring broader trends. Economists are confident the Fed will cut in September and are almost daily adding to the extent of the reductions likely to take place. The Reserve Bank of New Zealand, which openly conceded a recession was required to bring inflation to heel, may act as soon as next week. The Bank of Korea is unlikely to be far behind. Borrowing costs have been coming down in Latin America for some time. Expect hawkish language to accompany these pivots. We aren’t sounding the all clear, vigilance is required, and so on.

Hopefully, it won’t take a global recession for officials to jettison their inhibitions. For now, let’s call it a “yes, but” easing cycle. If subterfuge is necessary to sell what’s required, so be it. I’ll take that in preference to the alternative.