Could the Reserve Bank be planning an interest rate hike later this year, perhaps on the day that traditionally stops everyone across the nation except those on the RBA Board – Melbourne Cup Day?

Maybe, just maybe.  

Indeed, just when every economist around the country was prepared to write-off yesterday’s release of the RBA’s minutes from its recent policy meeting as nothing new, the Bank saw fit to drop an added line into the commentary – and one that Governor Lowe has been at pains to raise in recent months.

Just so there’s no confusion, the Bank indicated “[Board] members agreed that it was more likely that the next move in the cash rate would be up, rather than down.

What could cause the RBA to lift rates?  It was indicated in the very next sentence ”as progress in lowering unemployment and having inflation return to the midpoint of the target was expected to be only gradual, members also agreed that there was not a strong case for a near-term adjustment in monetary policy.

In short, what we’ll need to see is further declines in the unemployment rate – potential to around 5%, and ideally some lift in inflation to at least be comfortably at or above the RBA’s 2 to 3 % target band.  

Yet based on the RBA’s current forecasts, it’s still hard to see a strong case for a rate rise this year. In its February Statement on Monetary Policy, the RBA forecast the unemployment rate would end the year only a bit lower, at 5.25% (from around 5.5%), and that annual underlying inflation would hold steady at around 1.75%. 

Underlying inflation has averaged only 1.6% on an annualised basis over the past two quarters.

Yet the Bank only indicated it saw no need to lift rates in the near term.  What’s the near term?  One year, two years or six months?  It’s hard to know for sure.

One explanation for the RBA’s warning is that it’s very conscious that it has not raises rates in a very long time - seven years to be exact.  And so as the Governor himself acknowledged recently, when that fateful day does arrive it will “come as a shock to some people”.

What the RBA may be trying to do is jawbone very early to minimise this risk, or at least reduce the risk of any unwary borrowers taking on a lot of debt in the mistaken belief that interest rates will stay low forever. 

The RBA is telling us, ‘don’t say you weren’t warned”.

Along these lines it’s also likely that the RBA is very encouraged by the so far orderly correction in once red-hot Sydney property prices – even without it having to touch the interest rate lever.  It’s probably hoping this correction continues and it would be uncomfortable if cheaper prices and less frenzied buying conditions quickly goaded a lot more supposed “bargain hunters” back into the market.  Indeed, recent home lending numbers suggests there’s already been some stabilisation in investor property demand so far this year.

Supporting this view is the RBA’s willingness to warn of further property declines ahead. Indeed, in the minutes the Bank noted Sydney prices “had declined by a little under 5 per cent since their peak in mid 2017.” But it added “members also noted that declines in housing prices of around 10 per cent in some cities had occurred several times over the preceding 15 years.”

Of course, if the economy is stronger than expected this year, a rate rise is still possible – especially if higher US interest rates and weaker iron ore prices finally cause the $A to fall closer to around US70c.  But I’m still not counting on it at this stage. I still feel that despite the RBA’s recent rumblings, persistently weak wage growth and intense competition on retail prices will keep inflation contained and the Bank sidelined this year. 

The RBA is barking, but I still doubt it will bite anytime soon.