Feathers may fly as Philip Lowe plays chicken

RBA boss Philip Lowe is prepared to wait until the very last minute before he taps the monetary policy breaks.

After extraordinarily bullish inflation and jobs forecasts revealed on Tuesday, the question has to be asked: why is Philip Lowe not rushing to fire the starting gun on rate hikes?

Lowe says underlying inflation will hit 3.25 per cent by about the middle of this year, before moderating in the next – but only to 2.75 per cent.

Essentially, the Reserve Bank governor reckons consumer price growth will be above the midpoint of the 2-3 per cent target range at least out to the end of 2023.

The jobs market is expected to heat up. Unemployment will drop below 4 per cent this year, and as low as 3.75 per cent in 2023.

If that happens – and the hundreds of thousands of job ads suggest it’s a reasonable chance – we will have the lowest jobless rate since August 1974, inflation above target, a booming economy, and rates at virtually zero.

What would the proverbial alien arriving from outer space make of that configuration?

Yet instead of declaring “mission accomplished” and getting on with hiking rates, Lowe has made it clear he wants more time. He wants to be sure. He wants to be “patient”.

That’s because all the pieces have fallen into place for a rate rise, bar one.

The missing puzzle piece is wages growth. Lowe cannot conceive of a world where inflation is sustainably within the target range without pay rising at least 3 per cent a year.

Sure, there are anecdotes of dishwashers getting paid $60 an hour, and widespread reports of employers desperate to get workers. Yet the RBA’s preferred (and dated) wage price index lifted by only 2.2 per cent over the year to September. That’s not enough.

By waiting for a wages outbreak before applying the brakes sooner, Lowe risks having to hike harder later if expectations get out of control and pay begins to spiral higher. That raises the risk of what is politely referred to as a “policy mistake” – a central bank-induced recession.

After a decade of stagnant consumer prices, the governor is playing chicken with inflation. Let’s hope we don’t get flattened by it.