Reserve Bank of Australia’s grim warning for Australians

While the central bank didn’t change rates at its latest meeting, it did flag an issue it fears could have a huge impact on Australians.

ANALYSIS

This week’s RBA meeting was, on the surface, a regulation affair.

The bank did not hike rates nor change its neutral bias.

However, its rhetoric around the progress made on inflation did change and not for the better for mortgage holders.

The bank sounds impatient.

“Inflation is easing but has been doing so more slowly than previously expected and it remains high. The Board expects that it will be some time yet before inflation is sustainably in the target range,” the RBA’s statement released after last week’s meeting read.

“While recent data have been mixed, they have reinforced the need to remain vigilant to upside risks to inflation. The path of interest rates that will best ensure that inflation returns to target in a reasonable time frame remains uncertain and the Board is not ruling anything in or out.”

The change in tone is especially noteworthy given three outstanding factors.

The first is that inflation is about to take another leg lower mechanically on energy bill rebates from state and federal governments.

These make it likely that inflation will fall below 3 per cent in the September quarter:

However, the RBA sees this relief as temporary given the rebates will roll off. This is unwise. The politics of the energy transition means they will very likely be rolled over again.

Second, the RBA has put a high premium on a rebound in productivity to contain wages growth.

This is underway as the immigration surges of the past two years are absorbed and the investment boom that accompanied them bears fruit.

This has already led to a steep fall in unit labour costs, the RBA’s preferred measure of wages growth and its impact on inflation:

Yet the RBA was not satisfied, slamming 2.9 per cent annualised growth as too high. “Productivity growth needs to pick up in a sustained way if inflation is to continue to decline,” it said.

Third, despite still good job growth, unemployment has been rising with strong immigration for seven months.

Leading indicators such as job advertisements suggest more joblessness is ahead:

Again, the RBA was very grumpy: “Conditions in the labour market eased further over the past month but remain tighter than is consistent with sustained full employment and inflation at target.”

What are we to make of this impatient central bank? Is it about to hike again despite obvious and ongoing progress on inflation?

The bank is clearly concerned that forthcoming tax cuts will boost demand and undo this progress.

Rates are on hold. Picture: iStock

Indeed, it said as much in its statement yesterday, “recent budget outcomes may also have an impact on demand”.

However, the bank still has time to let weakening incomes deflate prices so it is probably best to see this as a rhetorical warning to households not to get carried away with new tax cheques.

They have been warned.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geopolitics and economics portal. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

Originally published as Reserve Bank of Australia’s grim warning for Australians