Election 2022: Campaign or not, the Reserve Bank has to act on interest rates

Reserve Bank governor Philip Lowe has signalled he will hike rates in June, but the largest increase in consumer prices since the introduction of the GST may force his hand in May. Picture: Getty Images

From historic opportunity to historic cock-up.

This is the reality facing Reserve Bank governor Philip Lowe, who now has to admit that under his watch, and in striving for full employment, the central bank has let inflation run too far with no monetary response.

Dr Lowe’s assurances that Australia was somehow dramatically different from places such as the United States, United Kingdom, Canada – even New Zealand, for goodness sake – where consumer price growth has careened out of control have been proved hollow by today’s inflation figures.

Take out the distortions associated with the introduction of the goods and services tax at the start of the century, and the 5.1 per cent jump in headline inflation over the year to March is the highest since the mid-1990s, not long after the RBA adopted its 2-3 per cent inflation mandate.

And it’s the credibility of that mandate – of the central bank itself – that is now in question.

Dr Lowe has called this all wrong.

The governor only admitted a rate hike in 2022 was “plausible” at the start of this year. Dr Lowe was in lock-step with Treasury in chasing the “historic opportunity” of getting unemployment below 4 per cent, and that this justified playing chicken with inflation.

That now threatens to be a historic mistake.

Now, as is the case overseas, and most especially in the US, monetary policymakers look way behind the curve and will have to play catch-up through faster and larger rate hikes. That increases the risk that the central bank will trigger an economic downturn in its race to prevent a damaging inflationary outbreak.

The official figures showed the prices of essentials such as petrol, groceries, rents and so forth are rising at 6.6 per cent as a group, or more than twice the 2.7 increase in so-called discretionary goods and services. Some inflationary pressures may prove transitory, but they will stay higher and last longer than the central bank thinks.

The RBA board meets next Tuesday, and – election be damned – how can they not raise the cash rate target from where it is now: virtually zero?

Dr Lowe is stuck between a rock and a hard place.

He will get no thanks from borrowers or the government for hiking rates in a few days’ time.

But if he holds to his stated approach of waiting for the wage price index and the average hourly earrings numbers in the national accounts before pulling the trigger, the RBA will be roundly condemned for not being prepared to do its job: tame inflation.

Dr Lowe would do well to heed the words of his predecessor, Glenn Stevens, who in 2007 was asked whether he would be prepared to raise rates in the middle of the election.

Dr Stevens said, “I think that the only answer I can give is: if it is clear that something needs to be done, I do not know what explanation we could offer the Australian public for not doing it, regardless of when the election might be due”.

Dr Stevens did what needed to be done, hiking rates in the middle of a federal election campaign.

Will Dr Lowe?