"A more sensible level" is an adjective doing a central bank's arithmetic

The word doing the work

“More sensible level.” Three words, and every one of them is a judgment rather than a measurement.

The Reserve Bank of Australia — the institution that sets the cash rate that flows through to mortgages, business loans and deposits — has told a parliamentary committee that rates are only just getting back to where they ought to be. Within a day, financial markets had priced the probability of another increase this month at about 95 per cent. The framing and the pricing are not independent events. The first produced the second.

Notice what “sensible” is substituting for. Somewhere in the Bank’s analysis there is an estimate of the neutral rate: the level of the cash rate that neither speeds the economy up nor slows it down. That estimate is not directly observable. It is inferred, it moves, and it comes with error bands wide enough to drive a business cycle through. All of that uncertainty disappears into an adjective. You cannot disagree with “sensible”. There is no number in it to be wrong about.

Why a destination is harder to stop than a step

There are two ways a central bank can explain a tightening. It can say: inflation came in above our forecast, wages are running faster than productivity, so we are adding restriction and we will stop when those readings turn. That is a case about a step, and each step has to be argued afresh.

Or it can say: we are returning to a more sensible level. That is a case about a destination, and it pre-authorises every step between here and there. The burden of proof inverts. Under the first framing, the Bank has to justify each move. Under the second, a critic has to justify stopping short of a place that has already been labelled sensible — which is to say, arguing for an insensible rate.

This is why 95 per cent should be read as a warning rather than a success. Near-certainty ahead of a meeting is usually a good thing: it means the Bank has not blindsided anyone, and bond markets are not forced to reprice violently on the day. But there is a difference between a market that has reached near-certainty by reading the same data the Board reads, and one that has reached it by reading the Board’s mood. The first is transparency. The second is deference.

The paper trail test

It is worth looking at what a tightening argument looks like when it is fully documented. On the same day the Australian testimony was being reported, the Bank of England held its rate at 3.75 per cent and put out a Monetary Policy Summary and minutes, an exchange of letters between the Governor and the Chancellor about inflation missing target, a second exchange about the unwinding of its bond holdings, a market notice on how gilt sales will actually be executed, and a transcript of the Governor’s broadcast interview. A reader who thinks that decision was wrong has five documents to quarrel with and a named committee to quarrel about.

The Australian equivalent, as it reached the public this week, was a characterisation of a level. The broadcaster called the message “sobering” — that is the reporter’s word, not the Bank’s, and nothing here turns on it. What does turn on something is the Bank’s own phrase, because that phrase is the load-bearing element of the public case for a hike that is now 95 per cent priced.

The strongest case for the adjective

Here is the best version of the other side, and it is not weak.

Central banks that publish point estimates of unobservable quantities get punished for it. Put a number on neutral and it becomes an anchor: markets treat it as a commitment, the press treats every revision as a U-turn, and the Bank loses the flexibility to change its mind as the data change. Plain English exists precisely to avoid false precision. Governors are also routinely accused of hiding behind technical language; “a more sensible level” is at least comprehensible to someone with a mortgage, which a discussion of the real neutral rate is not.

The answer is that a number with an honest range published quarterly is more revisable than an adjective, not less. A range of, say, several percentage points, restated each quarter with the reasoning, invites exactly the argument the Bank says it wants. It can move without embarrassment because it was never presented as precise. An adjective, by contrast, cannot be revised at all — it can only be abandoned, and abandoning it looks like a reversal.

And “sensible” is not plain speaking. Plain speaking is telling people that borrowing costs are being raised deliberately, that this is intended to slow spending and hiring, and that the Bank judges the cost worth paying. That sentence is short, it uses no jargon, and it is honest about who bears the burden. “Getting back to a more sensible level” is shorter still, and it conceals all three of those things behind the suggestion that nothing is being done to anyone — that policy is merely returning to its natural home.