This economist has correctly predicted each of the RBA's last 12 moves. Here is how he does it

Every first Tuesday of the month at 2:30pm, everyone from mortgage holders to interest rate traders and economists collectively hold their breath for the Reserve Bank of Australia's monetary policy decision. And for those who live and breathe the in's and out's of monetary policy, it can get quite addictive. Predicting what Governor Lowe and his board will do and when can be considered akin to playing with fire but right calls can lead to million-dollar profits at some investment houses.

George Tharenou knows what it's like to wait with bated breath for the RBA's decision. As UBS' chief economist in Australia, it's Tharenou's job to write up the how's and why's for clients ahead of each meeting and following each meeting. 

He also happens to be really good at calling them. He has predicted the central bank's next move every single month for the last year without fail (and he has the track record to prove it). 

So how does he do it? And what can investors learn from the way he approaches rate decision calls? In this wire, you'll find out the answers to these and many other pressing questions.

Tharenou's background

Tharenou joined UBS in 2006 as senior economist after stints at the Reserve Bank and the Queensland Treasury. 

Raised in Queensland and a graduate of the Queensland University of Technology, Tharenou admits he always had his sights set on this career path.

Tharenou clinched the top job in 2017 after Scott Haslem left the post. Haslem is now CIO at LGT Crestone. He says his day-to-day doesn't always involve just sitting in front of the ABS website waiting for data to drop.

"A lot of it is judgement, and analytical thought beyond just the daily data flow and news and creating a narrative and a story for clients that's understandable," he said.

Why Tharenou predicted last week's RBA move would be a pause

Tharenou was one of the 19 economists in the Bloomberg survey to correctly predict last week's RBA move. Far more importantly, it kept Tharenou's winning streak of 12 consecutive and correct rate calls intact. He attributes his outperformance to understanding how changes in language from RBA Governor Philip Lowe impact policy. 

But as is with many things in central banking, what they do is not always what they should do. So does Tharenou think the RBA made the right call for the economy's sake?

"I think that the pause decision was the correct one in the sense that the RBA now has policy and at restrictive levels, and are requiring a hurdle that's greater for them to move rates up again. And I think that will be delivered in August, when the board's presented with inflation forecast, which is still above target next year," he said.

His decision making process

While a lot of his work involves data crunching, writing, and presenting views to clients, Tharenou says the real secret to calling the RBA's next move is to read between the lines - work out if changes to language are on purpose and will actually materially change the way they see policy moving forward.

Where he sees things now

12 months ago, Tharenou's 'terminal rate' (endgame) for the RBA would have been 2.5%. That figure is in line with what the RBA thought was the "neutral" rate (where the RBA thinks the policy rate should settle once all shocks have played out in an ideal world). 

"A year ago, many had expected a much lower peak rate, and I think we've been surprised significantly by the persistence of global inflation as the primary factor for the reason why rates have increased more than expected. And the resilience of the global economy has been much greater as well," he said.

Now, Tharenou is calling for an 4.35% terminal rate, implying just one more rate hike in the months ahead. He also argues that the Bank will likely hold rates higher for longer, with his published research suggesting the first cut will only come in mid-2024.

"[Our] base case is 25 basis points more from the RBA, which has been a long held view. A peak rate in August is the most likely timing," he said. "I feel more comfortable that the likelihood is the RBA is signalling that they're more likely to do one, then multiple moves from here," he added.

Given Tharenou expects the Reserve Bank to hike next month (even if he does think it will be the last one), I also asked him about what the chances are of an Australian recession if the central bank were to keep hiking beyond his terminal forecast.

"UBS has been flagging the probability of a recession at 25%, simply based on the lags of policy, where the fixed rate mortgage cliff would start to hit the economy more materially from the middle of this year. We've been saying if the RBA continue rates rise from here, the probability is 50-50 of recession-overcoming quarters," he added.