Critical countdowns to two Tuesdays in May

The March quarter inflation numbers due out later this month will go a long way to determining what happens to interest rates over the rest of the year.

We are now deep into two critical countdowns – to the next inflation data in two weeks and the Reserve Bank meeting the following week; and then to the federal budget the week after that.

The March quarter inflation numbers will go a long way to determining what happens to interest rates over the rest of the year. They will absolutely determine what the RBA does at its May meeting.

A ‘good’ number would see the RBA pause again. And a pause in May would go close to ‘locking in’ another pause in June, with only a ‘bad’’ wages number in mid-May able to upset that.

Even a moderately high wages number, though, wouldn’t necessarily force the RBA to go back to hiking in June. The key message out of April’s pause was that RBA governor Philip Lowe – really, really - wanted to take time to assess the cumulative impact of the hikes to date.

Federal treasurer Jim Chalmers. Picture: NCA NewsWire / Sarah Marshall

What the inflation-wages mix will do is lay the basis for what happens to rates way beyond May and June, right through the rest of the year.

One scenario sees the RBA’s official rate peaking at its current 3.6 per cent; at least over the next few months, with the June quarter inflation data at the end of July then becoming critical.

The other sees April’s pause proving to have been a ‘one-month wonder’.

But it would take a seriously ‘bad’ – as in: shockingly surprising – inflation number, or a similarly awful (read: high) wages number, to see the RBA go back to hiking in June.

Labor Treasurer Jim Chalmers’s first real budget – last October’s was more a post-election, post-Covid, fiscal, economic and accounting, and forecasting, catch-up – will be seismic across such a wide front.

It’s obviously both a political and a fiscal/economic exercise – all built on assumptions and projections which will almost certainly prove wildly inaccurate. There was no way that Chalmers was going to assume responsibility for Victoria’s financial mess, ahead of getting on the plane to talk to the ‘big guys’ in Washington. Far less, a month out from his ‘Big Budget’

He would want clarity in his messaging; and splurging billions on a bankrupt state, the second biggest at that, would – to put it mildly – ‘cloud’ that.

He also wants the money in the budget for his – that is to say, Federal Labor’s – policy and political priorities. Not Victoria’s Dan Andrews.

All the numbers in the budget are built on economic projections and assumptions. And as Chalmers noted before getting on the plane, times were and would get even more (very) difficult”.

A year ago then Treasurer Josh Frydenberg forecast a $78bn deficit this current financial year. Chalmers’ October budget more than halved that to ‘just’ $37bn – thanks to booming iron ore, coal and gas prices.

Both lots of last year’s budget and economic forecasts were made before central banks got really serious with rate hikes, threatening global recession Also, back when the impact of Covid on supply chain disruption and so inflation, still lingered.

We are now in clearer Covid air.

But air, now clouded by the unknown impact of all the rate hikes.

Originally published as Critical countdowns to two Tuesdays in May