‘Patient’ RBA governor Philip Lowe has to get moving on interest rates

If we are to believe RBA governor Philip Lowe, he’s ‘not for turning’ on a rate rise until August at the earliest. Picture: NCA NewsWire / Jeremy Piper

The Fed finally – belatedly, around 12 months belatedly – moved its official interest rate off Covid Code Red Zero; now it’s the Reserve Bank’s turn.

But if we are to believe RBA governor Philip Lowe, he’s “not for turning” until August at the earliest.

He’s said the RBA’s prepared to be “patient”. He’s also said explicitly that he wanted to see another two quarterly CPI figures – the second of those comes at the end of July, ahead of the RBA’s August meeting.

However, I find it hard to believe he’s going to be able to stand up and say with a straight face that he still believes a zero official rate – or, to be pedantically exact, 0.1 per cent – is appropriate when the March quarter CPI prints an annual inflation rate of 4 per cent-plus.

And prints, even more potently, an inflation rate approaching 6 per cent over the six months to March on an annualised basis. Even the RBA’s analytically preferred underlying rate is going to go above 4 per cent for the six months to March annualised.

Those sort of numbers should lead to a rate hike at the next RBA meeting in early May; and indeed a hike that would go straight to 0.5 per cent. Frankly, I would argue for more, but realistically, given the starting point, that is both the minimum necessary and what’s acceptable.

In those circumstances, lifting by just 0.15 per cent to get it to 0.25 per cent would be pathetically inadequate. And could the RBA really, really, sit pat?

But a rate hike, far less a “biggish” one, in May? Hmm. It could even be in the last week of the election campaign. It could be in the middle of the campaign. I’m not sure which would be worse, so far as rate-phobic (incumbent) politicians are concerned.

There’s no real logic in the phobia; the first hike, indeed a few hikes, away from zero should be welcomed.

They are an affirmation of an economy in healthy good shape. There are also a lot of savers out there – heavily weighted politically towards the Coalition – who, I doubt, have learned to love zero rates on their savings.

Forced to live with them? Yes. But love them? I don’t think so.

I suggest, people generally would understand that these extraordinarily low rates are at least unusual if not unhealthy and certainly unsustainable; just like all the other things that have happened or rather been imposed on us, over the last two Covid-hysteria years.

As I wrote last week, the RBA should have moved – to 0.25 per cent – at its March meeting; if, for no other reason, to both accept and to signal that the “Covid emergency” was over. That like everything else, we had to start to get interest rates back to at least towards normality.

Self-evidently then, I would argue that having failed to do so, the RBA should rectify the matter by doing the hike in April – again, in common perception, somewhat awkwardly, although again, I don’t see why on earth it should be – immediately after the election-early budget.

The utter inappropriateness of the 0.1 per cent is further exposed in the juxtaposition of the inflation and jobless rates.

The next CPI will show something extraordinary: an annual CPI inflation rate (4 per cent-plus) that is higher than the official ABS jobless rate, around 4 per cent and maybe even into the threes in its April print.

That should be telling us, and the RBA more specifically, something. What it should be telling us is that 4 per cent-plus wage rises are coming, ready or not.

And that is precisely what could lock in 4 per cent-plus inflation and force the RBA to hike much more quickly and further than it wanted to or thinks it will.

We are already seeing murmurings of unions gearing up to press for 5-6 per cent wage rises in coming EBAs. Why wouldn’t they?

Can the government turn on the immigration tap quickly and strongly enough to head this off? Would suggestions of doing that prove a vote winner?

A vast proportion of the workforce – and the electorate – are in reach of the biggest nominal wage and salary rises they’ve seen in decades.

Yes, there will be a significant “money illusion” in them, especially after taxation, thanks to that rising inflation.

But there will be an even bigger punitive reality, if they don’t get the 5-6 per cent wage rises, but are held to, say, 3 per cent due to renewed immigration, when inflation keeps running at 5 per cent-plus.

And their home loan rates get hiked, starting in late May-June directly from the banks if the RBA has failed to itself move; and then being accelerated when the RBA does move.

These comments hold true even though the 4 per cent jobless rate, revealed and hailed on Thursday, was a fake number.

As Roy Morgan Research, which has a much (much) higher 8.5 per cent jobless number for February, points out, the ABS number is still significantly polluted by the Covid distortions.

The ABS counts as employed 131,000 people “working” zero hours for economic and “other” reasons. There are a further 222,000 people doing the same “zero hours work” due to illness, injury or sick leave. There obviously always are people in that second category, but for the last two years these numbers have been extraordinarily high.

Make the appropriate adjustments, and the ABS jobless rate is really more like 5.5-6 per cent. I would add that it is probably even higher, because of the long-time definition of being in a job – working at least one single hour in a week.

Again, I would suggest, there are probably far more people artificially in that category, boosting the jobs numbers and cutting the jobless rate, because of what might be called “economic long-Covid”.

Indeed, this only reinforces the case for early action by the RBA to head off a wages-prices spiral before it develops.