Reserve Bank must open the door to a March rate rise

Clearly accelerating inflation levels must force the Reserve Bank to bring forward interest rate rises into the first half of the year.

Reserve Bank of Australia governor Philip Lowe. Picture: Richard Dobson

At its first meeting for the year next Tuesday the Reserve Bank will – no ifs, no buts, no Fed-style trimming – end its money-printing QE program.

It will also leave its official interest rate unchanged at the all-but zero, leaving basic home loan rates undisturbed, for the moment, around 2 per cent.

After that it gets ‘interesting’.

What it should do is open the door to an interest rate hike at its very next meeting in March – with the wages data out late in February to be the decisive factor – as opposed to the August hike that the ‘boldest’ of the ‘experts’ have recently ‘boldly’ embraced.

It will likely do no such thing. Even so, as I wrote early in December, after this February meeting, willingly or unwillingly, the RBA meetings ‘go live’ in the basic way – will they or won’t they? – that we haven’t seen for some considerable time.

The reason is of course those ‘shock’ or ‘surprise’ inflation numbers. They might have been a surprise/shock to many, including the RBA; they certainly weren’t to me. Just as the previous September quarter ‘surprise/shock’ inflation numbers were no surprise to me either.

In early October, before we got the September quarter numbers, I had written that “inflation is coming, ready or not. Indeed, it’s already here if somewhat muted for the moment by the lockdowns in NSW and Victoria.”

Reserve Bank of Australia governor Philip Lowe. Picture: Richard Dobson

Back then I wrote that headline inflation was going to blow through 3 per cent for the December year when the RBA was forecasting it would be an unthreatening 2.5 per cent.

I also wrote that underlying inflation – what the RBA really focuses on – would go past 2 per cent and “maybe even significantly past 2 per cent”, when the RBA’s forecast was just 1.75 per cent.

Well headline’s come in at 3.5 per cent and even more potently that underlying rate hit 2.6 per cent.

These clearly accelerating inflation levels must force the RBA to bring forward interest rate rises not just into 2022 but into the first half of 2022.

This is made even more clear-cut when we zero in on what was even more clearly accelerating inflation in the last six months of last year.

For the six months to December headline inflation leapt to an annualised rate of 4.2 per cent; while the annualised underlying measure was 3.4 per cent.

Quite simply and utterly undeniably, a 0.1 per cent official interest rate (and 2 per cent home loan rates) is completely incompatible with headline inflation above 4 per cent and underlying inflation above 3 per cent.

Accelerating inflation levels must force the RBA to bring forward interest rate rises into the first half of 2022.

The inflation numbers should have made a rate rise next Tuesday a slam dunk.

But as I’ve been explaining, the RBA has “been on a journey” away from the emergency policy structure it put in place in November 2020; and in particular the “no rate rise (from 0.1 per cent) until early 2024”.

The first stop in that journey was opening the door to a 2023 rate rise.

Next Tuesday was going to be about opening the door to a 2022 rate rise. Now it has to be to an ‘early 2022’ rise; in my judgment, to a very early 2022 rise, with the wages data late in the month absolutely critical.

At least the RBA is not as far behind the curve as the Fed. We’ve got inflation nudging 4 per cent; the US has already printed inflation at 7 per cent.

Their wages are also rising faster than ours; as the real worry is a wages-prices spiral, and why the coming wage data – and what happens with immigration – are so critical.

We now get a break for Australia Day and it’s on to the Fed’s decision – or non-decision – early Thursday morning.