Did the RBA leak news of its rate rise? Kohler

The financial markets are abuzz with outrage over the apparent tipping off by the Reserve Bank of two journalists that rates were going to be raised yesterday.

I am told by a reliable source that the journalists were, in fact, deliberately nudged in the right direction to form that conclusion, and that there is concern and argument about the practice within the Reserve Bank.

The RBA won’t comment officially of course, and it’s completely unverifiable, but I understand the prevailing idea within the bank is that market expectations need to be smoothed to reduce volatility.

On Monday Ross Gittins of The Sydney Morning Herald and Alan Mitchell of the Financial Review predicted that there was a “high chance” of a hike (Gittins) or that one “now seems likely” (Mitchell).

It looks like informed speculation, and that’s probably exactly what it is. Neither the governor of the RBA, nor any official, would ever simply ring up a journalist and say: “we’re going to recommend a rate increase on Tuesday”.

But during the course of a conversation a clear impression can be given, and after matching the content of a few of such conversations against what actually happens later, a journalist can get a pretty good feel for what he or she is being told.

It is all quite unprovable, of course, but market economists have long believed, rightly or wrongly, that Gittins, Mitchell and Terry McCrann of the News Ltd tabloids are on an RBA drip, and therefore watch carefully what they write before an RBA board meeting.

There is an element of leak envy in the disquiet around the market now about Monday’s stories by Gittins and Mitchell. At that point, 18 out of 20 market economists were predicting no change and the futures market was pricing in a 20% chance of a hike.

As soon as the SMH and AFR hit the streets Monday, just about every economist hurriedly issued new client bulletins changing their tune and the futures pricing changed to 50% chance of a hike immediately.

ICAP Australia’s Adam Carr, who also appears in Business Spectator, wrote this week that if they are getting leaks, it’s “disgraceful” and “inappropriate”. Few others have been prepared to make such comments publically, but many feel the same way.

It seems to me there is one big, real problem with tipping off journalists and one potential problem.

The real one is that nudging journalists to ‘conclude’ what the leaker already knows means the board of the Reserve Bank is being manipulated, along with the market.

The directors get their meeting papers on Friday, when they find out what the staff recommendation will be. Under the legislation, the board makes the decision but if, by Tuesday, the financial markets are fully primed for a change in rates in line with the governor’s recommendation, it makes it much more difficult for the board to turn him down.

Remember also that the governor is both chief executive and chairman of the board – a combination that is strongly frowned upon in corporate governance because of the power it gives one individual.

That power is enhanced by the fact that there is only one other economist on the board – at present, Warwick McKibbin; the rest are business people who would find it very hard to take on the governor and his economic staff over technical economic issues.

And there is no doubt that the executive power can be made virtually irresistible by a leak, with the markets appearing to be backing the governor simply because they are pricing in a rate hike (or cut).

All of the governors of the RBA whom I have known, including the present one, have been men of great integrity. If any of them have authorised or provided leaks or nudges to journalists, it would genuinely be done to ‘smooth’ markets, not to manipulate their directors. But that may be the effect.

The potential problem is insider trading. I am sure that neither Gittins, Mitchell nor McCrann would ever trade on information or suggestions received in this way, but they are not the only ones in the publishing chain. Others handle their copy or have access to their publishing systems; foreign exchange markets can be traded through the night.

There is a wide range of ways that central banks around the world deal with the media. Some give press conferences when the CPI comes out, some give regular on-the-record interviews.

If the RBA really is worried about surprising markets with an unexpected rate change on Tuesday, monthly press conferences when the inflation figures come out might be a better idea.

Alternatively – just leak to Business Spectator, which always publishes immediately, and then I’ll shut up about it!

This article first appeared on Business Spectator.