RBA locks in rate hike - but when?

RBA governor Philip Lowe. Picture: NCA NewsWire / Jeremy Piper

Reserve Bank governor Philip Lowe has got himself into something of a pickle.

He has now left himself no option but to make the first official interest rate hike in more than 11 years at the next RBA meeting in early May – just a week or two before the election that prime minister Scott Morrison will call this week.

The Australian Bureau of Statistics will release the March quarter CPI numbers late in April.

They will show headline inflation for the year going above 4 per cent and maybe significantly above 4 per cent.

Either way the number will be significantly above the top of the 2-3 per cent RBA inflation target range.

More significantly – and in my judgment, far more potently – headline inflation in the latest six months to end-March will go above 6 per cent on an annualised basis.

The six-month data is far more relevant to the current inflation state of play – and, critically, where inflation will likely head – than 12 month data that sill scoops up much of the inflation-suppressing Covid-lockdown reality through the September 2021 quarter.

Even the RBA’s preferred analytical measure, underlying inflation, will go above 4 per cent for the six months on an annualised basis.

Now, one can debate how sustainable this higher inflation is; one can specifically, persuasively, suggest that a significant fall in petrol prices could be in the process of delivering a much lower headline inflation rate for the June quarter.

On that, to digress, the timing of the 22c excise cut looks – at least right now, which is all that really matters politically – inspired.

By riffing off a fall in the crude oil price, the 24c-plus cut in the price at the pump that it should have delivered (the 22c excise cut plus 2.2c lower GST) has been leveraged up to more like 30-40c.

One could also argue that the RBA needed to see, and analyse, the latest overall wages data, which surfaces later in May.

The RBA’s biggest worry about inflation is any sign of a prices-wages spiral developing.

Its main argument against hiking has been wages have until now broadly remained moderated.

But the absolutely one thing you cannot really claim is that a 0.1 per cent official interest rate remains appropriate if headline inflation topped 4 per cent and the most recently, six-monthly, data showed it closer to 6 per cent.

So does he hike, as he should at the May meeting? And quite frankly, go straight from 0.1 to 0.5 per cent, again as he should?

In my judgment it would be absurd to go only to 0.25 per cent; if you are hiking because inflation had gone above 4 per cent.

The time for getting the official rate off the 0.1 per cent ‘Covid emergency’ level was the February meeting, the first back for the year and the one that followed the accelerating December quarter inflation data at the end of January.

So does he hike a week or so out from election day?

Or does he ‘postpone’ the hike until the June meeting?

And if he so how does he explain it all?

He could hardly say, I would have hiked but for the election timing; so I am going to do it in June.

Or does he just ‘surprise’ – as in, totally not – with the June hike?

And if he did postpone to June, how would that be perceived and received by an incoming PM Albanese and Treasurer Chalmers, as I believe is all but certain?

The substantive policy change in Tuesday’s statement was to bury the “prepared to be patient” (about hiking).

This completed the journey from “not before ‘24” through a “hike in 22 was plausible” to one stop shy of ‘the hike’’.