The RBA has a track record second to none in the world of modern central banking.
In an economy which is small, open, captive to big commodity cycles, and a currency that has floated between 0.4775 and 1.1080 over 23 years of growth, the RBA has a firm grip on what it needs to do to keep the economy on an even keel.
Even with its track record of success, there are many who offer unsolicited advice to the Governor and the Board, loudly and often.
But governors Fraser, McFarlane and now Stevens have all charted their own course, sometimes enraging market commentators and traders and investors sure their view (and their profit and loss account) needs to be validated with RBA action.
I learnt more about myself and my trading with the unexpected RBA rate cut from Bernie Fraser’s RBA in July 1996 than on any one day in my career. I also lost more money in the blink of an eye than I ever care to again when they announced the cut. But, sitting at the next table at lunch a few days later when quizzed about the cut, Fraser said he was acting on a hunch that the economy needed some help. So he acted.
That’s the thing to remember with Australia’s RBA: it likes to do nothing, but when it needs to act, it does.
So the debate at the moment over whether the RBA will cut rates today is just one of many occasions when the bank has been faced with a market increasingly expecting action. It has a choice whether to follow the market or set its own path.
Which brings us to the psychology behind the pressure on the RBA when making its decisions.
In its Asia Morning Call today Soc Gen’s economic team – who aren’t expecting a cut – had this fascinating observation:
Faced with a rapidly increasing majority of prediction that the cash rate will be cut further, we do feel less confident about our view. In particular, we worry that the weight of expectations on the RBA’s deliberation will be overwhelming – not that we believe the RBA blindly follows market expectations, but if the Board fears that not delivering the expected policy easing would result in a resurgence of the currency, it would make a strong case for a rate cut.
This is the argument that while the RBA board may be of the view that rate cuts are not necessary, but decides the market would react so strongly that they may be forced to cut anyway.
Indeed, the pressure to validate expectations of easing is heavy on the RBA but veteran market participant John Craig believes it is that the RBA’s efforts at transparency – and its desire to lead rather than be lead – will mean that they signal a cut today rather than provide one.
It’s a view shared by University of Melbourne Economist Neville Norman who told ABC Radio this morning that having worked at the RBA many years back, and having been an RBA watcher for 40 years, he felt the bank would not be pressured by the market.
Market players have increasingly shifted their view towards a cut, some reluctantly and grumpily because they believe the pressure to cut is building and too great for the RBA to resist.
One thing we know though is that what ever psychological pressure the market wants to apply to the RBA, history tells us they will make the right decision and act when they need to.