In March, I wrote the following commentary about the Reserve Bank of Australia’s (RBA) monetary tightening:
Author Mark Twain once famously said, “History doesn’t repeat itself, but it often rhymes”.
We are witnessing such an event following the RBA’s back-to-back interest rate hikes, which have taken the official cash rate to 4.10%.
The interest rate futures market has also priced two additional rate hikes for 2026…
You will see from the above chart that the RBA hiked aggressively in the lead-up to the 2008 Global Financial Crisis (GFC).
The subprime mortgage crisis hit the US in the second half of 2007. Despite this, the RBA hiked the official cash rate by 1.0% (from 6.25% to 7.25%) over seven months, only to then rapidly slash rates by 4.0% when the full-blown GFC hit in September 2008, following the collapse of Lehman Brothers.
I feel that the RBA is setting itself up to repeat the same mistake…
I would not be surprised at all if the RBA responds similarly to the GFC and slashes rates to ward off recession.
Fast forward to today and the RBA’s assistant governor Christopher Kent used a briefing on Monday to outline how the Bank would respond to a crisis similar to the pandemic.
Kent outlined a ‘playbook’ for how the RBA should act when interest rates are low and more monetary policy tools are required. The issue of near-zero interest rates emerged, with it historically being the case that advanced economies cut interest rates by about 400 basis points during recessions.
With the RBA’s modelling suggesting there is a good chance of a recession in the next few years and Australia’s cash rate at just 4.35%, the Australian Financial Review’s Anthony Macdonald noted that the prospect of near-zero interest rates may not be far off.
“It was a bit weird talking about near-zero rates and what to do next given Australia’s inflation problem and expectations we could get a fourth rate hike this year”, Macdonald wrote. But “neutral rates had dropped so low that the prospect for near-zero rates was only ever just around the corner”.
Again, as Mark Twain famously said over 100 years ago: “History doesn’t repeat itself, but it often rhymes”.
