Interest rate call: The RBA is sugar-coating inflation and we will all pay the price
That’s what many in financial markets will be wondering after Reserve Bank governor Michele Bullock shifted to a merely “cautiously” hawkish stance at the central bank’s final meeting for the year.
She needs to be far more assertive about the real risks ahead.
Inflation momentum has been building across the economy since July. The headline rate sits well above the RBA’s target band, while the underlying rate of 3.3 per cent drifts ever further from reach. The central bank needs to stop sugar-coating the message, starting with ending all prospect of further interest rate cuts. Instead its still hoping that inflation will suddenly behave and start to drift lower again.
The RBA kept the cash rate on hold at 3.6 per cent on Tuesday, as expected. But credible market economists are now toying with the prospect of an interest rate rise as early as February. Money markets are pricing in as many as two increases next year, meaning the cash rate could have a 4 in front of it – if they’re correct.
By failing to slam the door shut on further cash rate cuts in her prepared remarks, Bullock left room for speculation to drift in about when the next one is coming. The dollar and bond market eased slightly on that small gap.
Just minutes after the Reserve Bank released its decision, Treasurer Jim Chalmers said Australians would have preferred more interest rate relief, claiming the inflation pick-up was due to “temporary factors”.
At least scaring the hell out of the economy about overspending – including governments – might have prompted some to reconsider leveraging up, or unions to moderate their wage demands. This hosing down of inflation expectations would be our last chance before the RBA really shocks us all with a rate rise – or even two.
The RBA is clearly grappling with sorting temporary inflation from what’s really happening with underlying inflation, especially as private investment recovers. Energy subsidies are distorting the picture, and Bullock wants her RBA not to appear overreactive. Still, headline inflation at 3.8 per cent hits households just as hard.
Later in her press conference, Bullock acknowledged the RBA’s boardroom discussion over the past two days centred on what conditions would warrant a rate increase. This is distinct from actually considering a hike – which was not debated at this meeting. Nor was a rate cut discussed.
It’s surprising the case for a rise – even if weak – wasn’t tested at the December meeting.
In response to a question, Bullock ruled out cuts for now, although this continued to be data dependent: “I don’t think there are interest rate cuts on the horizon for the foreseeable future.
“The question is, is it just an extended hold from here, or is it the possibility of a rate rise? I couldn’t put a probability on those,” she said. The Australian dollar then moved higher as Bullock spoke, yields on 3-year bonds also drifted up.
We all want rate cuts. But if inflation returns then this undermines everything. Inflation is a corrosive force. An inflationary economy damages more people – particularly those on low incomes – than keeping rates on hold. Inflation shifts wealth unfairly to asset owners and drains growth.
There’s a growing belief that the RBA’s determination to deliver a “soft landing” and protect jobs is partly why Australia now faces recurring bouts of inflation.
Bullock concedes that even at the current modest pace, Australia is already growing at full capacity, leaving “not much more room” for more growth.
There are few signs the forces driving inflation will fade soon.
There are two more monthly inflation readings due before the RBA meets again. This will be a long summer and the RBA will be sweating over whether it’s been too cautious.
Bullock flags potential rate hikes next year
What’s the point of carrying a big stick if you don’t put it on display when it’s needed most?