RBA faces criticism for delayed response, regardless of rates decision on Tuesday

Central banks are being targeted for delayed responses to inflation and now for putting economies at risk as they aggressively hike interest rates.

Reserve Bank Governor Philip Lowe. Picture Brad Crouch

Judo Bank co-founder Joseph Healy is right when he says the biggest policy issue facing central banks is delivering a hammer blow to inflation without creating a wave of mortgage stress and possibly killing the economy.

With local inflation lifting to 5.1 per cent in the March quarter, the Reserve Bank has been widely targeted for delays in pulling the rates trigger.

The RBA’s experience, however, pales against the Bank of England, as inflation surges to nine per cent – its highest level in 40 years – amid forecasts it will reach double-figures within months. Largely immune from criticism in the 25 years since it was given the independence to set interest rates, the UK central bank has been roundly attacked. One former minister told the House of Commons that the BoE had “persisted beyond any rational interpretation of the data to tell us that inflation was transient, then it would peak at five per cent”.

The BOE has effectively responded that it was no longer in a position to control inflation – it couldn’t do anything about global supply-chain problems or high energy prices fuelled by the war in Ukraine, both of which were feeding price increases.

Having had a taste of the hostility directed to its sister institution in the UK, the RBA will have been keeping a close eye on events, particularly given the bipartisan local commitment to an independent review of is performance.

After 40 years in banking, Healy said he has never seen anything like the accumulation of forces affecting central-bank policy deliberations. The traditional response of aggressive rate hikes to squeeze the life out of inflation carried the risk of precipitating a 20-25 per cent slump in house prices and killing the economy.

Next Tuesday, the RBA will announce its decision for May.

While most analysts forecast a 25 basis-point adjustment in the cash rate, Westpac chief economist Bill Evans has plumped for a 40 basis-point hike to 0.75 per cent.

The case for 40 basis points relies on the minutes from last month’s meeting, which said a similar rise was considered in May because of the upside risk to inflation and the current “very low level” of the cash rate.

RBA governor Philip Lowe will inevitably attract criticism, whatever decision he makes.

Originally published as RBA faces criticism for delayed response, regardless of rates decision on Tuesday