Terry McCrann: Our amigo’s rate-setting ride into a manana sunset

THREE months ago in January I wrote that — then relatively new — Reserve Bank governor Philip Lowe would kick off his first New Year meeting by leaving the official interest rate unchanged.

Reserve Bank of Australia governor Philip Lowe. Picture: AAP

THREE months ago in January I wrote that — then relatively new — Reserve Bank governor Philip Lowe would kick off his first New Year meeting by leaving the official interest rate unchanged.

He will do the same again next Tuesday for largely the same core reason: ‘Goldilocks’ inflation numbers. Indeed, if anything, Wednesday’s numbers for the March quarter were even more ‘Goldilockian’ than those for the December quarter three months ago.

The earlier ones showed quarterly inflation of 0.5 per cent making just 1.5 per cent for the full 2016 year. The latest ones showed the same 0.5 per cent quarterly inflation, but now making 2.1 per cent for the 12-month period to end-March.

As the RBA is mandated to aim for inflation of 2-3 per cent, the 0.5 per cent quarterly number — that’s, 2 per cent annualised — gets it, just, into the range. But the 1.5 per cent full-year number ‘fell short’. However in the latest numbers, the 2.1 per cent full-year number was in the range.

Reserve Bank of Australia governor Philip Lowe. Picture: AAP

Now I describe them all as ‘not too high, not too low, just right, Goldilocks-style’ not just because they fell into what is after all an artificial policy range, but for two more important substantive reasons.

The first is that this is pretty much where we want inflation to be. Anything much higher — especially, if it is starting to accelerate away — is always both bad news and the harbinger of even worse news to come.

Now, I don’t sign on to the view that has seized Lowe’s peers in the major central banks, the Fed and the ECB, that too-low inflation and indeed negative inflation (deflation), is as bad and perhaps even worse than too-high inflation.

Over time, some of the greatest periods for our economies and our societies have been those of sustained, significant, negative inflation. It’s a great — arguably, the best — way to make everyone richer, rather than just those who own houses. As indeed it did in the Western world through the 19th century.

However, I am prepared to accept that in the complex world in which we now live, that inflation running consistently around the 1.5 to 2 per cent shown in these numbers is reasonable.

The second reason why we really do want to see these sorts of inflation numbers is that we most certainly do not want to see Lowe’s hand forced back onto the ‘rate lever’. To move it, in either direction.

Just think about it; and this question is directed more at the analysts than the ordinary person, whether or not they have a big mortgage: would you really, sincerely, like to see the RBA cutting rates further? Equally, alternatively, would you really like to see the RBA starting to increase rates?

By Friday morning, President Trump will have unveiled his big tax package. Picture: AP

THERE are two big reasons why you don’t want to see either. The first is that such a move — either way — would speak to ‘unpleasant’ economic or financial conditions; and I’m using a very, very soft word.

The second is what I have been writing about in recent columns: what’s developing in global markets and with policy in the major economies, especially of course the US.

This morning President Trump will have unveiled his big tax package. If he does credibly promise to cut the US corporate tax rate to 15 per cent, that will send huge and sustained tremors through both global markets and the global economy.

If he doesn’t, that will have its own impact.

Next Tuesday, the same day our RBA meets, the Fed starts its May meeting. In its case though, it runs for two days, so we will only get its rate decision, again early Thursday morning.

If Trump delivers, there’s a very good chance that the Fed will deliver a ‘surprise’ rate hike. That would certainly surprise the global investment elite, which right now thinks there’s not much more than a 50 per cent chance of a rate hike, in June. That’s to say near-zero chance in May.

I have to dolefully concede that there’s an even ‘better chance’ that the Fed won’t hike because Fed head Yellen and her colleagues are terrified of ‘upsetting Wall St’. Even a Wall St that is near all-time record highs; the fat cats have never, never, been fatter.

Federal Reserve Board chair Janet Yellen is terrified of upsetting Wall Street.

To my mind, they could well do with a little Fed-imposed ‘dieting’. But Yellen is pot-committed to ‘trickle-down’: make the fat cats fabulously wealthy and the plebs will get more burger-flipping jobs.

Then we’ve got the French election Sunday week and the countdown to the British election in June.

In themselves neither is really that important in the broader global scheme of things, but they will play into markets and official interest rate settings.

This is a very, very good time, for our RBA to be sitting on its hands, to be a watcher and not a player. Also, to have flexibility to ultimately go either way with rates — but, manana, this time in the good meaning of the word.

A bit of a footnote: that low inflation is not quite what it seems, and what most of you are experiencing at the coalface.

Yes, inflation in things set in the market — like clothing, furniture and in the supermarket — are low and even negative. But inflation in things that are ‘controlled’ by someone (or by utterly stupid policy) like health (3.8 per cent over the year) and power (a thumping 7.5 per cent) are anything but low.

That’s another reason I don’t buy the ‘dangerous low inflation nonsense’.

First let the prices of these things be really set in a marketplace, without any government interference, and see what we get.

Originally published as Terry McCrann: Our amigo’s rate-setting ride into a manana sunset