Terry McCrann: RBA interest rate rise a done deal, but post-election increase must follow

It’s blindingly clear that a cash rate rise to 0.5 per cent is a done deal. But will the RBA follow through with another post-election hike? Terry McCrann argues it has to.

Can anyone with an IQ north of 50 and some pretensions to be an economist not now understand that the Reserve Bank must lift its policy rate next Tuesday; that it must lift it by 0.4 per cent; and that it will?

The idea that governor Philip Lowe could say an all-but zero 0.1 per cent cash rate is appropriate when annual inflation has gone above 5 per cent is not doing economic commentary but writing another Monty Python skit.

No, it’s not the ‘dead parrot’ which is ‘just resting’, just the RBA board and management – ‘resting’ through another 35 ‘sleeps’ until its next meeting after the election on June 7.

Knock, knock, is anyone awake in the commentariat?

It should now be blindingly clear that the key question is not whether the RBA hikes to 0.5 per cent in May – that’s now a ‘done deal’ – but whether it follows through with another 0.5 per cent in June after it sees the latest wages data mid-May.

I would argue it has to. We face our first serious inflation break-out since the early 1990s; and the RBA is starting seriously behind the curve.

Philip Lowe, Governor of the Reserve Bank of Australia, is behind the curve of a rise in inflation writes Terry McCrann. Picture: Lisa Maree Williams/Getty Images

Headline inflation is 5.1 per cent; it’s going to be least that for the June year.

In February the RBA was forecasting it would be only 3.75 per cent for the June year. It will have to – let’s be polite – ‘update’ the forecasts for the May meeting.

Again, seriously, is Governor Lowe going to say inflation is now heading for 5 per cent-plus for the June year but 0.1 per cent is still appropriate for the moment?

It’s important to understand that current inflation is much higher than the 5.1 per cent. That includes the low inflation back to the June quarter last year when much of the economy was still in and out of lockdowns.

Annualised inflation for the last six months was running close to 7 per cent; even the RBA’s underlying inflation rate was running at 4.8 per cent annualised.

Now, the RBA is not quite as far behind the curve as the Fed – the US Federal Reserve should have started raising its policy rate from zero a year ago.

Surging oil and gas prices in part caused by Russia’s invasion of Ukraine led to petrol prices well above $2 per litre. Picture: Tony Gough

Back then the Fed was dismissing the inflation as ‘transitory’, predicting it would be back to around 2 per cent by the end of 2021.

It wasn’t; it was at 7 per cent and heading higher and all before the surge in oil and gas prices after Russia attacked Ukraine and the supply-chain price-hiking consequences of China’s grotesque and draconian ‘zero-Covid’ policy.

Terry McCrann is a multi-award winning commentator on business and the economy.

Not as bad, but still behind the curve; as I explained last week, New Zealand shows how inflation can accelerate very quickly.

Over there, inflation started 2021 at just 1.5 per cent; it finished 2021 at 5.9 per cent.

Ring a bell? In Australia, inflation started 2021 at just 1.1 per cent; it finished 2021 at 3.5 per cent and is now above 5 per cent.

In contrast to the RBA, the NZ Reserve Bank set about hiking last October. It’s had four hikes and its policy rate is already up to 1.5 per cent.

Short of some global implosion we will be there as well in coming months.

Home loan borrowers who haven’t seen repayments rise for a dozen years are going to see a series of repayment hikes as the year unfolds.

Next week’s hike will see repayments rise by perhaps $120-$200 a month, depending on the size of the loan.

Assuming as I do there’ll be another hike in June, repayments could rise by a further $75-$125 a month if the rate hike is only 0.25 per cent, and another $150-$250 a month if it’s 0.5 per cent.

Originally published as Terry McCrann: RBA interest rate rise a done deal, but post-election increase must follow