RBA edges towards May rate hike

The release of inflation data next Wednesday will render it utterly unsustainable for the RBA to keep the cash rate at 0.1 per cent for even another week, far less another month.

Reserve Bank Governor Philip Lowe. Picture: Jane Dempster/The Australian

The central thing to appreciate about the Reserve Bank minutes is that they explicitly state what the board and the executive management led by Governor Philip Lowe thought two weeks ago – not what they think, and so might have done, right now, far less in two weeks.

The second thing to understand is that the RBA’s coming decision on interest rates at that next meeting in two weeks will be done on the basis of new forecasts for the economy, but which will only be published in full some days after the meeting.

Although based on the practice he’s recently adopted, Lowe will refer to the key forecasts – GDP growth, inflation and the jobless rate in his statement after the meeting.

The single most important input into both those new forecasts – and so, critically, the rates decision - will be the latest inflation data, for the March quarter, which will be published by the ABS next Wednesday.

The key thing in – actually ‘not in’ – the statement after the April 5 meeting was the word “patient”.

Up to and including the March meeting, Lowe had been saying that the board was prepared to be “patient” about raising its official cash rate.

(Memo to politicians: it is 0.1 per cent).

The word was dropped from the April statement; again, pertinently, in the broader context of Lowe’s earlier comment that a – that is to say, the first – rate rise in 2022 was now “plausible”.

Reserve Bank Governor Philip Lowe. Picture: Jane Dempster/The Australian

Now we discover that there was a lot, and I mean a lot, more to be told about what happened at the April meeting than simply removing the word “patient”.

The minutes revealed that “developments” – very specifically, the rising inflation in the March quarter, to be officially confirmed next week – “have brought forward the likely timing of the first increase in interest rates”.

Interestingly, uninformatively, that sentence was not included in the policy statement after the meeting.

As I have been arguing, it is my judgment that the “developments” and specifically the inflation numbers have to bring forward the rate increase timing all the way to the May meeting.

And I see further cracks in the commentariat consensus that the first hike would be in June as Lowe would not hike in the election campaign.

On the weekend I noted the AMP’s chief economist Shane Oliver opening the door – ever-so slightly – to a May hike; Tuesday after the minutes, CommSec’s Craig James, equally tentatively, joined him with a May hike “can’t be totally ruled out”.

This is where the inflation data becomes so telling, as it will force the RBA to significantly lift its anticipation of inflation, not just from what it had last forecast in February, but what the board and management were still thinking just two weeks ago.

In February the RBA had forecast 3.75 per cent headline inflation and 3.25 per cent underlying inflation for the full 2021-22 year (to June).

The ABS will release data next week which is likely to show that inflation is heading for close to or even higher than 5 per cent for the full 2021-22 year.

The ABS data next Wednesday will show headline inflation getting very close to that just for nine months – to the March quarter; that is to say, heading for close to or even higher than 5 per cent for the full 2021-22 year.

Further, critically, full-year measures – whether to March or to June – include the low inflation months back in 2021 when much of the economy was in business-crushing lockdown.

Inflation just in 2022, right now, is running at levels more like 5-6 per cent - with even the RBA’s preferred underlying at more than 4 per cent.

After next Wednesday the RBA will have to accept that reality in its May forecasts.

It is a reality which renders utterly unsustainable any continuation of the cash rate at 0.1 per cent for even another week, far less another month.

Originally published as RBA edges towards May rate hike