With all the prognostic knowledge supposedly residing within its headquarters in Sydney’s Martin Place, one would think the Reserve Bank’s intelligence collectors should have seen it coming.
It has been clear for months that an inflation data dump would land right in the middle of an election campaign. RBA scouts also couldn’t have missed LED-illuminated fuel prices and exploding supermarket bills that warned March’s CPI would be big.
And yet, just as the government failed to pay attention and derailed China’s security pact with our former friends in the Solomon Islands, the RBA finds itself in a strategic and political bind this week: raising the cash rate on the Tuesday’s monthly board meeting to counter the higher rate. inflation in more than 20 years, or wait until after the elections?
Credibility is at stake. Just as Scott Morrison called any new Chinese base in the Solomon Islands a “red line” for Australia, dismissed as “ridiculous” in Beijing, RBA chief Phil Lowe has repeatedly stated that he wanted to see both inflationary trends and an acceleration of a decade’s worth of weak wage growth before pulling the trigger on the rate increase.
We don’t get the latest figures until May 18, when the Australian Bureau of Statistics releases the wage price index. But as Saul Eslake, a high-profile independent economist acknowledges: “These data may well show that there is does not have there has been a significant uptick in wage growth.”
But the breadth of inflationary pressures now being experienced in the Australian economy “puts the RBA in a position where its credibility would be at serious risk if it doesn’t raise rates.” [this] week,” says Eslake. “If you don’t raise rates, [the RBA] it leaves itself open to the suggestion that the only reason it hasn’t raised rates is because of the upcoming federal election.”
John Howard’s bid to win a fourth reelection was hit by a rate hike in late 2007. Another rate hike midway through the campaign would hurt Morrison’s claims, already hurt by the 5.1% CPI index. , that the Coalition is a better economic manager than Labor, just 18 days before the polls close.
The talk in Canberra is that the RBA brainiacs are confused about which way to go. Most market economists have forecast a rise in the case rate this week from a record low of 0.1% to 0.25%, although the CBA, Australia’s largest mortgage lender, opposes it.
Gareth Aird, chief economist at the CBA, says that while the surge in inflation may well justify a rate hike, Lowe has yet to signal a change in policy, as has become the norm for nervous bankers. central.
Instead, the RBA had for two years emphasized the importance of seeing higher wages. It would be “a blow to their credibility” if the RBA raised rates before seeing WPI.
“Basically they would have reneged on what they said just two weeks ago. [with the release of the April board meeting’s minutes]Aird says.
Alan Oster, Aird’s counterpart at NAB, takes the opposite view. The RBA has more reputation to lose by delaying dealing with an inflationary threat that had become increasingly apparent at home and abroad, even before the Russian invasion of Ukraine.
“I think it might actually help his credibility a little bit because, let’s face it, it’s pretty bad as it is,” says Oster, rattling off a list that includes the failed exit from last October’s rate suppression efforts that rattled markets. of bonds.
“Their forecasts for wages, prices, what they would do, what they wouldn’t do, everything has changed,” he says, with a glaring flaw in the RBA’s view of when rate hikes would resume. “Six months ago, they were saying it wouldn’t be until 2024.”
He says, “They might get a little more credit if they really say, ‘Stop, things have changed. We need to move.’”
Timo Henckel, senior lecturer at the Australian National University’s research school of economics, says the RBA “got cornered”. Until recently there had been talk that inflation had been very low and of the need to fuel at least moderate inflationary expectations.
Breaking a promise to keep interest rates low for three years to help the economy through the pandemic two years later didn’t help the bank’s position either.
Henckel, a member of a shadowy RBA board trying to anticipate the bank’s moves, says it remains “50-50” as to whether Lowe will cross his red line and raise rates before receiving official wage data. .
Still, “I’m just not convinced that the salary number really provides that much additional information,” says Henckel. “What would the salary number have to be for them to decide not to raise it in June?”
Henckel says it’s “an amusing view” that a rate hike next week would be a political act, given that postponing a month increases the risks of inflation spiraling out of control and requiring more drastic rate hikes later to bring it under control.
“There is no such thing as neutrality and monetary policy,” he says. “Even if you don’t change interest rates, that’s taking a stand, right?”