Thought walking rates were tough? Wait for Pause


If breaking up is hard to do, explaining why you want to breathe comes a close second. Unless you’re confident it’s time for something new, the temptation to make mistakes is considerable. In monetary matters, figuring out what an interest rate break looks like—and the degree of conviction behind it—can be a dangerous exercise. Calculating when to take five comes with a lot of risk.

Central banks are unlikely to be adamant when they suspend interest rate hikes in the coming months. It can only be clear in hindsight that the hold button was pressed. For good reason: inflation is easing, albeit significantly above target. Global growth is slowing, albeit less than feared not so long ago. Juicy data, such as a strong number of jobs or prices that seem a little too sticky, can influence sentiment about the future path of borrowing costs. Will it be one or two more nudges higher, maybe even three?

The pitfalls of trying to spot the advent of a pause were evident last week when the Reserve Bank of Australia raised its key rate by a quarter of a point, as predicted by most economists. The sting was in the accompanying statement. The words were harsh enough to launch predictions of a break in a month or two – and push the Aussie up and bonds down. Governor Philip Lowe dropped last year’s assertion that the bank was not on a predefined path and said more increases were needed.

It’s not so much that Lowe indicated there’s still work to be done that bugged investors. It’s too soon to end inflation, especially as the bank is still being criticized for suggesting late last year that rates may not need to rise until 2024. What stood out in the RBA’s comment is the absence of any clear indication that a break was on the table. Records of the RBA deliberations in late 2022 showed that a suspension was among the options the board considered. “Our job is to call out what we think the RBA will do and not what we think they should do,” wrote Gareth Aird of the Commonwealth Bank of Australia, who now sees the base rate rising from 3.35% to 3.85% . He said the policy was heading “into deeply restrictive territory”. The risks of a mistake are multiplying.

By the way, a gap year is not a guarantee of rest. Bank of Canada Governor Tiff Macklem declared a conditional pause last month and is now advocating for the middle ground against hawks and pigeons. Macklem thinks it could take 18 to 24 months to see the full effects of higher borrowing costs. “We need to stop interest rate hikes before we slow the economy and inflation too much,” he told a business audience. “We should not keep raising rates until inflation returns to 2%.” It’s been a while since a central banker has publicly worried about the risk of inflation receding too far.

Bank of Korea people would do well to review Macklem’s address. Early to hike rates in 2021, the BOK was widely believed to be poised to bounce off a high this month. Then last week’s numbers showed that prices spiked in January, keeping the prospect of further tightening alive. The pause could still happen, with cuts until the end of the year, but there is a slight element of doubt. Governor Rhee Chang-yong warned in January that markets shouldn’t be too quick to declare the hike cycle complete. Malaysia rejected an expected rise last month, while Indonesia posted a moderate rise – a quarter-point rise accompanied by the suggestion that the authorities have already done enough. If inconvenient data starts to appear, both will be under pressure to revisit. The obvious criticism: why did you risk doing too little instead of too much?

Risk management is not what it used to be. In his first speech as chairman of the Federal Reserve at the institution’s annual Jackson Hole retreat in 2018, Jerome Powell spent a lot of time extolling Alan Greenspan’s approach. In particular, he liked the conductor’s habit in the 1990s of delaying little by little until the choices became clearer. So it was about whether — and when — taking a break was more prudent than staying put. Powell characterized the modus operandi of that time as follows: “The committee converged on a risk management strategy that can be summed up in a simple request: ‘Let’s wait one more meeting; if there are clearer signs of inflation, we’ll start tightening.’” The situation now could be framed as follows: wait on the pause until you are sure that inflation is on the rise and will not rise again – and embarrass you.

The process has already begun, although it is not yet fully completed. Like digging through a cardboard container long after the move has unloaded your bulky furniture. The break is here somewhere. Just one more box.

More from Bloomberg’s opinion:

• Let’s be big enough to accept this economic gift: Daniel Moss

• Fed pivot is dead. Long Live the Fed’s Pirouette: Robert Burgess

• Can’t give up your low mortgage rate? Renovate!: Alexis Leondis

This column does not necessarily reflect the views of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was executive editor for economics at Bloomberg News.

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