This morning has brought some bad news for the central banking fraternity and sorority. It comes from a land down under so let us take a look.
At its meeting today, the Board decided to increase the cash rate target by 25 basis points to 4.10 per cent.
That is from the Reserve Bank of Australia and it has been forced to increase interest-rates again. We can start with a conceptual failure by the RBA itself.
While inflation has fallen substantially since its peak in 2022, it picked up materially in the second half of 2025. Information since the February meeting suggests that some of the increase in inflation reflects greater capacity pressures. In addition, the conflict in the Middle East has resulted in sharply higher fuel prices, which, if sustained, will add to inflation. Short-term measures of inflation expectations have already risen. As a result, the Board judged that there is a material risk that inflation will remain above target for longer than previously anticipated.
The reason I pit it like that is because I pointed out on here that the situation above was on its way On the 26th of June 2024 I pointed out this.
The money supply is not showing that things are restrictive and seemed to be suggesting another push. I can update that now with the April figures which were 0.4% on the month raising the annual rate to 5.1%. So if we look ahead 18/24 months for inflation to be running at 2% we would need growth of 3% and the latter does not look likely as we recall Australia is in a GDP per capita recession and depression. So there is a clear risk for inflation two years ahead.
The money supply numbers did not predict the war around Iran but that there was inflation on its way at the policy horizon. Instead of responding to this the RBA cut interest-rates on three occasions last year. Here is its explanation from May.
Staff forecasts released today project that while headline inflation is likely to rise over the coming year to around the top of the band as temporary factors unwind, underlying inflation is now expected to be around the midpoint of the 2–3 per cent range throughout much of the forecast period.
One might reasonably think that after the catastrophic failures in the cost of living crisis they would have the sense to avoid the temporary line but they did not. What has in fact happened is that the inflation rate has doubled from its nadir in June last year to this.
In the month of January, the CPI rose 0.4% in original terms and rose 0.5% in seasonally adjusted terms.
In the 12 months to January 2026: The Consumer Price Index (CPI) rose 3.8%.
As you can see the inflation rate has moved above target and rising energy costs look set to push it higher. The RBA will be even more in the firing line as on December 3rd I noted that it has been told this in Australia’s parliament.
The RBA has a cash rate target for annual inflation of 2% to 3%, over the last 80 quarters, annual inflation has only been within the target range on 26 occasions. ( Cameron Kusher)
The response from Governor Michelle Bullock was frankly desperate.
So at the moment our judgment is that the material missed on this occasion was at least partly temporary factors, so a number of things just randomly sort of increasing more quickly,
So we have yet another policy error and this feeds through into other central banks. For example there were expectations of an interest-rate cut by the Bank of England on Thursday which have been replaced by the risk it may have to raise interest-rates later this year.
The expensive QE Legacy
Another reason higher interest-rates are like kryptonite to central bankers is that they still hold lots of government bonds on their balance sheet. The RBA for example has Aussie dollar investments of $257 billion on its balance sheet. If we look back we see that when it surged into the Aussie bond market like a US Cavalry charge it pushed the ten-year yield below 1%. Yet it is now financing these purchases at a cash rate of 4.1% thus a back of the envelope calculation suggests that will cost it some Aussie $7.5 billion over the next twelve months.
As you can see a frightfully intelligent move by a group of frightfully intelligent people has somehow led to ever growing losses. Who knew that buying at the highest prices ever could go wrong? Also if we look at the present situation there is no reasonable way out in the financial markets as the Aussie ten-year yield touched 5% yesterday. So on a marked to market basis the position looks awful or they can keep making annual losses. It was not supposed to be like this as these frightfully intelligent people decided that there would be plenty of time to dispose of their bond portfolios.
Federal Reserve
Remember this?
The Committee decided to conclude the reduction of its aggregate securities holdings on December 1.
Which meant in practice this.
Beginning on December 1, roll over at auction all principal payments from the Federal Reserve’s holdings of Treasury securities….Beginning on December 1, reinvest all principal payments from the Federal Reserve’s holdings of agency securities into Treasury bills.
So it is running an interest-rate risk of just under US $6.4 trillion. Under the planned policy of future interest-rate cuts the cost of this would fall. But rises are very expensive as even a 0.25% increase is meaningful then you are funding a position of that size.
Bank of England
My home country the UK is still trying to reduce its running losses via QT balance sheet reductions. Yesterday it did this and below is my social media summary..
With the UK bond market struggling and yields soaring the last thing Chancellor Rachel Reeves needed today was the Bank of England selling some £775 million of UK government bonds today. But that is what it did…
As you can see it was a case of bad timing. But it is between a rock and a hard place because it is paying 3.75% on bonds it is often receiving less than 1% on. So it was willing to lose around 40% on the bonds maturing in 2037 it sold yesterday.
Bank of Japan
The Bank of Japan has in my view been completely captured by this issue as I pointed out back on October 2nd 2023.
As you can see the Bank of Japan ignores marked to market losses. If I owned so many JGBs I might be tempted to do that as well but of course I would go straight to jail. Even under current policy they have large losses at a benchmark yield of 0.75%. Imagine what they would be if Yield Curve Control stopped and interest-rates rose and you quickly come to the conclusion that fears over its balance sheet have been a factor on the Bank of Japan not raising interest-rates.
Comment
As you can see the central bankers are singing along with Colonel Abrams.
I am trapped
like a fool I am in a cage.
I can’t get out
you see I am trappedcan’t you see I am so confused?
I cannot get out
you see I am trapped.
If they are forced to raise interest-rates again then they are even more trapped at our expense.