Rates will go up, no matter who wins election

Financial markets are pricing in the first cash rate hike just after a likely May election.

Scott Morrison may not hold the interest rate lever but the man who chairs the board that does has set the scene for what the economy will look like after next year’s election campaign.

In an address to business economists in Sydney on Tuesday, Reserve Bank governor Philip Lowe said the economy was on the mend, after being hit by Covid-19’s Delta outbreak in the middle of the year.

No matter which party wins the federal election, the RBA expects a full-blown recovery, and over the next two years Australia’s economy will be hitting good areas, as they say about the ever-reliable Pat Cummins and Josh Hazlewood.

According to Lowe, we’ll have an inflation line in the “twos” and a jobless-queue length in the “fours”, and over the past 50 years those numbers “would have been considered very good outcomes”.

Lowe also provided a reality check, as the electioneering begins in earnest. This beautiful set of numbers has come about only because of near-zero interest rates and unprecedented budget spending by Canberra.

“We need to remember, though, that we are in this place only because of extraordinary policy support,” Lowe said of the coming boomlet.

“Over time, as a country we will need to refocus on the underlying drivers of growth in the economy and jobs”.

It’s one line in a speech but another reminder from the policy elite that the sugar hits must end and the next government has to get busy on big reforms: tax, infrastructure, workplace relations, training, innovation and red tape.

At some point in the next term, official interest rates will rise from an emergency level of 0.1 per cent.

Financial markets are pricing in the first cash rate hike just after a likely May election, no matter who’s treasurer – Josh Frydenberg or Jim Chalmers.

Lowe again told traders they were dreaming, blowing their dough, and that the conditions for a rate rise were unlikely to be in place before 2024, although it was plausible this could occur in 2023.

Lowe’s priority is fighting “low” inflation, just like the Prime Minister’s priority is holding power. The RBA chief wants higher inflation because that would be a sign the economy was humming, which would allow monetary settings to be normalised.

He is aiming for annual core inflation to be sustainably within a target band of 2 to 3 per cent. That’s his job, and during his tenure, which began in September 2016, he hasn’t managed to hit the mark until the latest reading.

Why? Because of globalisation, technology, the weak bargaining power of workers, a wage system that locks in mediocre gains over several years, and the zeal of Australian managers in cutting costs.

“While this outcome was higher than expected, it is important to remember that at 2.1 per cent, underlying inflation is only just above the bottom of the 2 to 3 per cent target band and remains lower than the average for the past three decades,” he said.

“We expect underlying inflation to pick up further, but to do so only gradually.”

Got that? There are supply constraints and rising production costs at play, but in Australia inflation is missing in action. To meet his target, Lowe needs wages to be growing by an annual 3-something per cent, not the 1.7 per cent recorded in the year to June.

That pay stagnation will be central to Labor’s pitch, as the ­Coalition is exposed, for now.

Whoever can offer the best plan to ignite productivity growth to drive higher living standards should be rewarded by voters. Let’s not be distracted from that.