Reserve Bank of Australia governor Philip Lowe needs to bury his ‘not this year’ rate call

The vast majority of borrowers with a home loan have never seen an interest rate rise, apart from fiddling at the edges, as we haven’t had an official rate rise in more than 11 years. Above, Reserve Bank governor Philip Lowe. Picture: Jane Dempster / The Australian

Let’s take stock, after what has been effectively the week that formally kicked off 2022. And it was a week that certainly didn’t disappoint, captured in those two successive $40bn-plus days that took the ASX and the rest of us to the weekend.

That was of course, $40bn down on Thursday and then $50bn up on Friday – the latter, certainly a bold and even “courageous” play by investors heading for a Wall Street Friday.

The week and even more the year got started with the December quarter CPI numbers, released a day early on Tuesday because of Australia Day, and showing headline inflation of 3.5 per cent for the 2021 year and underlying inflation of 2.6 per cent.

Reserve Bank governor Philip Lowe had spent five years since he got the job in September 2016 waiting for the underlying rate to get above 2 per cent; it finally did, just, at 2.1 per cent in the September quarter; and then it well and truly did at that 2.6 per cent for the December year.

The numbers were hailed as a “surprise”; they could only have been a surprise to those who didn’t understand what’s been happening in the economy, because the really telling numbers had actually come in the September quarter data.

Headline inflation for that quarter had been 0.8 per cent, underlying (trimmed mean) 0.7 per cent: the first a little over 3 per cent on an annualised basis, the second just a little below 3 per cent.

The critical thing to appreciate is that sort of inflation came in a quarter when more than half the national economy – Victoria and NSW – were in lockdown for much of it. Indeed, GDP fell 1.9 per cent in the quarter.

Inflation was clearly building – when the economy went seriously south in the June 2020 quarter with the national lockdown, headline CPI plunged 1.9 per cent in a single quarter.

Inflation was also clearly going to accelerate in the December quarter, as consumers freed from lockdown and with massive savings went on a spending binge into staff-constrained retail and hospitality sectors.

If anything, inflation in the December quarter might reasonably be said to have “surprised” on the low side, with the quarterly headline rate going up only from 0.8 per cent to 1.3 per cent; and the underlying from 0.7 per cent to 1 per cent.

If we put the two quarters together, headline inflation ran at an annualised rate of 4.2 per cent and underlying at an annualised rate of 3.4 per cent for the half.

Yes, governor Lowe doesn’t see inflation “sticking” until and unless wages growth kicks up above 3 per cent – and the prospect of that is buried deep in what happens to migration and the inflows of backpackers, students and other visa holders to fill staff gaps.

Or, their non-inflows to spark and sustain 4 per cent and higher wage rises.

And yes, we can also rationalise Covid-driven supply chain disruptions driving “temporary” price rises – most visibly in both new and used cars — that will (might?) fall away.

But the absolutely undeniable reality is that a zero official interest rate is utterly incompatible with, most current, printed headline inflation of 4 per cent-plus and printed underlying inflation of 3 per cent plus.

Now I do not expect governor Lowe to do on Tuesday what Fed chairman Jerome Powell conspicuously, disgracefully, did not do last Thursday morning our time: kick off the year with a surprise – no qualifying quotation marks needed – rate hike.

Yes, the RBA will clearly terminate its QE program in February; it will be important to see whether the RBA will commit to rolling over maturities or allow them to pay out – un-printing some of the billions printed.

But he must formally bury the explicit “not this year” for a rate hike.

Indeed, running down to Christmas this meeting was going to do that – although the (now increasingly) “outdated” forecasts from the November RBA meeting had implicitly continued to underwrite the original “not before 2024 (or late 2023)” promise.

The RBA now has to go further; to at least, if only implicitly, bring the rate rise possibility into the first half of 2022.

But whether or not the RBA accepts it, whether or not it’s stated explicitly, as I argued late last year, RBA meetings will go “live” after this one.

The wages data that surfaces late in February will be absolutely critical to what is said – and done – at the March meeting. That meeting comes the day before the December quarter GDP numbers, which will show “surprisingly” strong growth; surprising, at least, to many if not most of the “experts”.

The vast majority of borrowers with a home loan have never seen an interest rate rise – apart from some fiddling by the banks at the margin – and so have never experienced higher repayments, as we haven’t had an official rate rise in more than 11 years.

Across the Pacific, Wall Street “seemed” to accept the Fed’s supposed “hawkishness”, all but “correcting” market values without overreacting.

The idea that even the Fed’s fake hawkishness is now priced into Wall Street, and so our market as well, is a complete and dangerous fallacy.

First, there ain’t no real hawkishness; not from a Fed that is leaving its policy rate at zero for another six weeks – with the promise that at best/worst it might be up to 1.5 per cent by year’s end – when inflation has been over 5 per cent for more than six months and is now 7 per cent.

But secondly, more dangerously, Wall Street is buoyed by over-strong corporate profits – led off by Apple; profits which are precisely a product of that inflation and a strongly recovering economy, shown by the 6.9 per cent (annualised) December quarter growth.

We face months of tap-dancing between the spineless members of the Fed and the greediest people on the planet infesting lower and mid-Manhattan.

The Wall Street – and global market – reckoning still awaits.