Reserve Bank must deliver two 50-point interest rate rises

The Reserve Bank must lift its official interest rate by 50 points at its Cup Day meeting and do the same again at its last meeting for the year in December.

The RBA needs to move up from its ridiculously low 2.6 per cent. And reasonably quickly.

The Reserve Bank must lift its official interest rate by 50 points at its Cup Day meeting and do the same again at its last meeting for the year in December.

As I explained mid-September, the RBA would probably go back to a 25-point hike at its October meeting – ‘pausing’, so to speak, after four 50-pointers in a row, to see what the September quarter CPI showed last week.

The RBA did exactly that – surprising the ‘experts’ who had almost all predicted another 50-pointer at the October meeting.

Well, what the CPI ‘showed’ was inflation getting worse not better as the RBA – and all those so-called ‘experts’ – had predicted. Or perhaps more accurately, had hoped.

So, the question was posed: is the RBA behind the inflation curve?

The answer from the CPI was very clearly: yes.

It is small comfort that every central bank around the world is as well, with only the RBA’s ‘cousin’ across the Tasman, the RBNZ, taking its duty seriously and aggressively seeking to ‘catch’ the curve.

The RBNZ – quite uniquely – started lifting its official rate away from zero or near-zero (in its case, 25 points) in October last year.

The Fed only made its first hike in March and our RBA waited until it could wait absolutely no longer in May.

To be said in the RBA’s favour, inflation in the US had been accelerating since early 2021. The Fed in its utter incompetence and hostage-to-Wall Street disgrace took almost a year to make its first hike.

In Australia’s case, inflation had really only started to build after Victoria and NSW came out of their last lockdowns in late 2021; and then got boosted like everywhere around the world by Russia’s attack on Ukraine in late February.

Yes, after the first 25 points our RBA’s then had four 50-pointers, before the last 25-pointer, to get its official rate up to 2.6 per cent.

But the RBNZ has now had five 50-pointers in a row. Its official rate is at 3.5 per cent.

Inflation on both sides of the Tasman is almost exactly the same. In NZ it was 7.2 per cent for the year to September; in Australia it was 7.3 per cent.

Let me spell it out, yet again, to the clearly numerically challenged ‘experts’.

An official interest rate at 2.6 per cent when inflation is 7.3 per cent is a negative real rate of minus 4.7 per cent.

That is highly stimulatory. Even if the RBA does lift to 3.1 per cent on Tuesday, it will still be minus 4.2 per cent.

Even if it follows through with another 50 points in December, taking its rate to 3.6 per cent, the real rate would still be a highly stimulatory minus 3.7 per cent.

Further, think about this, as the so-called experts are incapable of doing.

When the RBA cut its official rate to 0.1 per cent in late 2020, the inflation rate was 0.7 per cent – after the big plunge in prices due to the national lockdown in the June quarter of 2020.

On paper, the real official rate therefore was only minus 0.6 per cent.

If we took a more realistic assessment of underlying inflation, the real rate was probably more like minus 2 per cent.

But whatever, the reality of inflation running way ahead of the RBA’s rate hikes this year, the real rate today is far more stimulatory than it was when the RBA’s rate was all-but zero.

Now, no, the RBA does not need to lift its official rate to 7 per cent. Or even 5 per cent. And certainly not immediately.

But it does need to move up from its ridiculously low 2.6 per cent. And reasonably quickly.

Two 50-pointers before Christmas is the very least it must do.

Originally published as Reserve Bank must deliver two 50-point interest rate rises