I suppose we should be grateful the Reserve Bank doesn’t pay much attention to the monthly inflation data, only the quarterly, so our emotions don’t get jerked around every four weeks, just every three months.

But most of all we should be grateful to them for not blindly following other central banks and hard-line economists to a 5 per cent policy rate. Instead, they held back, trying to keep the misery to a minimum while still getting inflation down.

Past RBAs would have brought about another “recession we had to have”.

Some recent history is in order to set the scene for where we are now, and the pressure that’s now on the RBA to change tack.

On October 25, the ABS announced that the September-quarter core inflation rate was 1.2 per cent versus the previous quarter, which was an “upside surprise”. (Core inflation is what the RBA sets interest rates by. In Australia it refers to the “trimmed mean”, where the largest and smallest 15 per cent of price moves are removed and the statisticians do an average of the middle 70 per cent.)

As a result, economists predicted a rate hike in November, and on Melbourne Cup Day the RBA duly announced the 13th increase in the cash rate since May 2022. The statement retained the “tightening bias”, which is to say they made it clear they were leaning towards another one.

The Statement on Monetary Policy (SMP) a few days after that lifted the RBA’s inflation forecast for the year to December 2024 from 3.1 to 3.3 per cent.

Then on January 31, the December-quarter CPI was a “downside surprise” – 0.6 per cent for the headline number and 0.8 per cent for core, below what economists and the RBA had expected.

Tightening bias gone, then …

At the meeting six days later, rates were left on hold, the tightening bias was weakened and the December 2024 inflation forecast in the SMP was cut to 3.2 per cent.

It was another hold in March and the tightening bias was dropped entirely. The minutes of the meeting later confirmed that the board didn’t even consider a rate hike, for the first time since May 2022.

No meeting in April, and then last week – whoops! – another upside surprise: core inflation was 1 per cent in the March quarter when it was supposed to be 0.8 per cent.

As one, Dr Jekyll economists turned into Mr Hyde and whipped away the rate cuts they were predicting for this year; by Friday the futures market had moved to a 50 per cent chance of rate hike in September.

In fact one of the newly Mr Hyde economists – Warren Hogan of Judo Bank – threw us on the mat with a prediction of three rate hikes this year, to a cash rate of 5.1 per cent. Warren was the only bank economist to predict five rate hikes last year to 4.35 per cent, and was therefore the only one to be correct, so he isn’t ignored.

“The RBA’s strategy this cycle doesn’t seem to be working,” he told the Financial Review. “We just need to now get up to the [cash rate] level that other countries are, at 5 per cent.”

Really? Another rate hike? Or three? Aren’t we forgetting the downside surprise of December? As RBA governor Michele Bullock said in March, nothing can be ruled in or out.

Waiting game

But unless at next week’s meeting the outgoing RBA board members do a knee-jerk response to last week’s upside CPI surprise, they’re likely to wait for the next quarterly inflation number before making that decision.

That is due on July 31, for the June quarter.

The RBA’s most recent forecast for core inflation in the year to June was 3.6 per cent (it doesn’t provide quarter-by-quarter forecasts), and in the year to the end of March the trimmed mean CPI increased by 4 per cent.

To hit that 3.6 per cent forecast, the quarterly increase in the June-quarter CPI would have to be 0.6 per cent (unless the forecast changes in the next SMP in May).

That would be a big drop from the 1 per cent in the March quarter and something we haven’t seen since June 2021, in the midst of the pandemic.

But you’d have to think the first RBA meeting under the new regime of a separate monetary policy board, yet to be appointed, to be held on August 5-6, is “live”, as they say.

That is, unless there is another big downside surprise, a change is likely – at the very least the RBA will reinstate its tightening bias in response to the June-quarter CPI, and possibly another hike, as Warren Hogan predicts.

That’s especially true since the tax cuts on July 1 will provide the equivalent something like two or three rate cuts, depending how much of the money is spent.

Kudos for restraint

But aside what might happen in future, which is unknowable, it’s worth celebrating the restraint of this group of Reserve Bank directors.

Hard- line economists reckon we should have had a cash rate above 5 per cent like most of the world, and Warren Hogan believes we’ll soon get there.

But the reason we didn’t need to do that can be seen in two charts. It’s true Australia’s policy rate has increased the least among equivalent countries – the US, UK, Canada, Europe and New Zealand.

But the mortgage rates actually paid by Australian borrowers have gone up the most.

This is simply because Australia has the most expensive houses, the most housing debt, and the greatest proportion of variable rate mortgages, so rate hikes (and cuts) get passed on more fully, and more quickly.

But because the RBA had an eye on this, and didn’t blindly follow other central banks to 5 per cent, unemployment here has stayed under 4 per cent and inflation has been reduced from 7.8 per cent to 3.6 per cent without a recession.

The last one per cent of disinflation is always the hardest, but the RBA shouldn’t lose its nerve now.

Alan Kohler writes weekly for The New Daily. He is finance presenter on the ABC News and also writes for Intelligent Investor