RBA must wake up to the ‘new reality’

The RBA on Tuesday will at the very least raise the official cash rate by 25 basis points but it needs to go higher and pretty quickly. Here’s why.

The RBA needs to boost interest rates pretty quickly.

Tuesday is the first day in the rest of all our lives when the Reserve Bank makes its second official interest rate hike since way back in 2010.

That in itself should remind you of something very, very significant.

It captures just exactly why the world we are now entering will be different, very different to the one that, up until March 2020, people had become to think of and to treat as the ‘new normal’.

For more than 11 years we had been living in a world where rates had been either steady or falling – culminating with a year and a half of literally free money.

In November 2020, the RBA cut its rate to 0.1 per cent; it gave the banks nearly $200bn, ‘charging’ them just that rate; and mandated they could raise all their other money at 0.1 per cent or even cheaper, absolute zero.

For something like half those with home loans, they’d never experienced a rate – and repayments – increase.

Now they are going to get hit with plenty.

Maybe, if Covid had never come along, we – or rather the RBA – would have stopped at 0.75 per cent.

But even back in ‘pre-Covid’ February 2020, there was not the slightest sign it would embark on rate hikes anytime soon.

Now it is so ‘embarked’.

For something like half those with home loans, they’d never experienced a rate – and repayments – increase.

If it does what it really has to do Tuesday, it will – at the very least - raise to the same 0.75 per cent, to that pre-Covid level.

But it needs to go higher, and pretty quickly. We are clearly facing a perfect storm on the inflation front, and the starting point comparison with that pre-Covid point in time is both damning and ominous.

Back in February 2020, inflation was just 1.8 per cent and the jobless rate 5.3 per cent.

Now inflation is 5.1 per cent, and clearly heading – leaping? – higher, and the jobless rate is 3.9 per cent.

Before even considering what’s happening to petrol, gas, electricity, food and other consumer prices, do you think – do you really thunk – that the same 0.75 per cent would be anywhere near appropriate?

The RBA was behind the curve before the sudden eruption of energy prices.

It didn’t see the 5 per cent inflation coming, far less the 7 per cent or so inflation will record this quarter.

And that’s all essentially before the full whack of the tidal wave of price rises we are now seeing, and will continue to see through a pretty dismal winter of discontent.

It wasn’t as far behind the curve as the US Fed, but it compares very poorly with its cousin across the Tasman.

The RBNZ has already got its rate up to 2 per cent, compared with our RBA’s 0.35 per cent.

In announcing the increase last month, RBA governor Philip Lowe said they’d opted for 25 points rather than 15 points or 40 points to signal that we were “getting back to business as usual”.

Fifteen points would’ve been small and 40 points to take us to 50 would’ve been, “you know, larger than normal”.

And then he added, almost as inappropriately as those now etched in stone ‘not before 24’ words: “so we want to get back to normal and business as usual”.

Sorry Governor, there is no “normal”, there is no ‘business as usual”, to be “getting back to” – in large, part, but only in part, precisely because of what the RBA has been doing in mandating zero rates and printing money.

There’s also the new ab-normal which is now rushing at us, as the massive disruptions of the past two years join with the earthquakes out of Ukraine.

The RBA needs to collectively wake up fast to the new reality.

Two key parts of that reality is the new government’s backing of a 5.1 per cent minimum wage rise and next week’s meeting of the slow-moving Fed.

The RBA is clearly going to get those bigger wage rises it’s been ‘wanting’ for three or four years now. Be careful – fearful - of the RBA getting what it wishes for.