RBA ready to hit brakes if inflation runs away

Economists say the Reserve Bank could announce it plans to abandon its 0.1 per cent three-year target as soon as next Tuesday’s board meeting, as investors price in a February rate hike.

Reserve Bank of Australia deputy governor Guy Debelle says a little inflation was good, but too much was not. Picture: AAP

Reserve Bank deputy governor Guy Debelle says the central bank is on guard against an unwanted inflationary outbreak, as economists said this week’s strong CPI figures were an “inflection point” that presaged an imminent tightening of monetary policy.

ANZ head of Australian economics David Plank the RBA could abandon its 0.1 per cent bond yield target as soon as next Tuesday’s meeting.

The rate on the April 2024 commonwealth bond traded above 0.5 per cent on Thursday – or more than five times the RBA’s 0.1 per cent target – as conjecture grew that the central bank will on Tuesday signal that the first rate hike could come sooner than its previous guidance of 2024.

“We expect such a move, with the RBA abandoning the yield target completely as a consequence,” Mr Plank said.

He said the three-year target – which has helped drive fixed-term mortgage rates to below 2 per cent through the pandemic, as well as making business loans cheaper – had “served its purpose”.

However, “this shift in the RBA’s outlook would still mean it thinks any actual move in the cash rate remains a long way off”, he said, estimating that the RBA would not expect the first hike to happen until the back half of 2023.

Mr Plank said next Friday’s statement on monetary policy would show the RBA now projects inflation of “2 per cent or more for the entire period out to the end of 2023”.

In a Senate estimates hearing on Thursday, Dr Debelle said he saw “strong underlying momentum” in the economies of NSW and Victoria as they exited Delta lockdowns. The Sydney-based Dr Debelle said “obviously we have only just emerged here (from lockdowns) in the past week or so, but most of what we see is positive”.

As newly reopened states roar back to life and the world struggles with supply chain blockages, inflation data this week showed consumer prices rose by 3 per cent over the year to September, with petrol and housing construction costs accounting for two-thirds of that gain.

Crucially, the RBA’s preferred underlying measure of inflation pushed to 2.1 per cent – the first time it’s been in the 2-3 per cent target range since 2015. That sparked an avalanche of bets on ­financial markets that the first rate hike from 0.1 per cent to 0.25 per cent could come as early as next April. Ahead of next week’s monetary policy board meeting, Dr Debelle said the central bank was on guard against letting consumer price growth get out of hand.

“We are looking to generate a little higher inflation than we’ve had over the last five or six years,” Dr Debelle said. “A little bit more inflation is welcome, but a lot more inflation is not welcome.”

He said there were “hot spots” in the labour market where workers were getting solid pay rises, but the question for the RBA was how widespread this was and whether stronger wages growth represented a one-off “level change” as a result of the pandemic, before growth goes back to its previous lacklustre performance of “two-point-something”.

CBA head of Australian economics Gareth Aird noted that “a meaningful lift in core inflation has taken some time to appear in the official data in Australia (as) wages pressures have been slow to emerge”.

“That will change from here,” Mr Aird said, with Tuesday’s inflation figures the “inflection point”.

“The fiscal splurge, financed by money printing, is the circuit breaker the RBA has required to achieve higher inflation,” he said. “The oddity would be if we did not see a continued lift in inflation next year.”

Mr Aird brought forward his estimated timing for a 0.15 percentage-point rate hike by six months to November 2022, as he forecast stronger economic growth thanks to “remarkably high vaccination rates” leading to a faster than expected easing of Covid-19 health restrictions.

In a speech in September, RBA governor Philip Lowe said “it won’t be enough for inflation to just sneak across the 2-3 per cent line for a quarter or two”.

The Australian Bureau of Statistics’ wage price index lifted by only 1.7 per cent over the year to June – barely half the rate of ­inflation. Dr Lowe has indicated that wages growth of above 3 per cent was consistent with inflation staying within the band.