Is this the last rate hike? Wages hold the key

Philip Lowe will have gone from “zero” to “hero” if Tuesday’s rate hike is the last in the current cycle and it might just extend his term as RBA governor.

It is now all about wages.

Whether, in the first instance, Reserve Bank governor Philip Lowe follows through with his – as I see it - ‘current intention’ to pause the RBA rate rises at the next meeting in early April.

Whether, in the second instance, he pauses again at the May meeting – and thereby making more likely than not, that he pauses at the June and July meetings as well.

And then, in the third instance – indeed, in the ultimate, in the ‘main game’ instance – he is actually done with rate rises entirely.

That this rise will have proved to be the last, at least of ‘this cycle’.

If that proves to be the case, he will be the “hero” not the “zero” of my column that I wrote a month ago, after the February meeting.

At the February meeting, despite his 25 point hike, the key thing was that he did not hike by 50 points after the 7.8 per cent inflation number – the highest inflation in over 30 years.

I wrote this confirmed he was “sticking with his softly-softly approach – he calls it a “narrow path to a soft landing” – to hopefully wind inflation down without sending unemployment shooting up”.

If he succeeded he would be a hero: getting inflation sustainably down to the 2-3 per cent target range, without the crippling double-digit jobless rates of the early 1990s or even near double-digit jobless rates.

If he didn’t, he would go down as the governor who blew near 30 years of RBA low-inflation success, earned and delivered on the back of that early 1990s pain.

He has in a sense doubled down on that.

RBA governor Philip Lowe. Picture: Brent Lewin/Bloomberg via Getty Images

Not with the 25-pointer on Tuesday, but the clear signal he would embrace rate pauses - punting on inflation having peaked in the December quarter; and on unions and workers not being able to win across-the-board 4 per cent-plus wage rises.

That’s the most – actually, better more like 3.5 per cent on average – that his ‘softly-softly’ approach to getting inflation down to 3 per cent by mid-2025 can tolerate.

If he can do it with a policy rate that tops out at Tuesday’s 3.6 per cent – and so, no further punishing home loan rate rises – he will have done so with both a lot less rate pain, and a lot less economic and jobless pain, than most other countries.

And especially NZ and the US – with punishing US rate rises actually helping him (and us).

It would also play into any possible extension as Governor.

If we get to September – when his current terms expires - and Tuesday’s rate hike has been the last, there would be both a good political case for extension; and, in my judgment, even more importantly, an unassailable substantive case as well.

Bluntly, there is no good alternative.

This is not a negative comment on his deputy, Michelle Bullock – simply that it would be too soon, consequent on the departure of long-time deputy governor and all-but certain internal successor, Guy Debelle.

I’m not happy with the prospect of a ‘new broom’ external successor sweeping into Martin Place.

There’s too much risk of starry-eyed ‘let’s live with a bit more inflation’.

Let me emphasise, the prospect of extension is not driving his decisions; he’s not going to deliberately postpone rate-pain until after September.

So his future, your future, now turns on what is happening to wages right now.

Over the December quarter the WPI (wage price index) was up 0.8 per cent and 3.3 per cent for the year.

That’s right on Lowe’s “narrow path”.

The next numbers come out mid-May.

But there’ll be a lot of anecdotal and sectoral (wage and jobs) data on what’s happening along the way.

Originally published as Is this the last rate hike? Wages hold the key