RBA should keep options open for March rate rise

Looking at the RBA’s latest forecasts, they are almost an economist’s definition of a best of all possible (fantasy) worlds.

Governor of the Reserve Bank of Australia, Philip Lowe, in a National Press Club address on Wednesday. Picture: NCA NewsWire / Jeremy Piper

Reserve Bank governor Philip Lowe – fully backed by his board – has done something extraordinary in the first policy meeting back for the year, after two months since the last meeting way back at the start of December to “think about it”.

After the RBA badly underestimated the rising tide of inflation in the December half, Lowe has pre-committed, fully three months ahead, to “look through” the sustaining of that high inflation – and “hopefully” not its possible acceleration – in this current March quarter.

He knows – as indeed should any half-sentient economist with a basic grasp of arithmetic and some vague understanding of what’s happening in the economy – that (year to) March quarter headline inflation will rise towards and quite possibly hit 4 per cent, with underlying (trimmed mean) inflation going, maybe even substantially, above 3 per cent.

Yet knowing that – we will find out the exact numbers when the ABS publishes the quarter’s CPI at the end of April – Lowe has pre-committed to not raise the RBA’s official rate from its near-zero at the May meeting a week later. After, of course, not raising in the March or April meetings either.

It would be all too easy to spring to the cynical, Mandy Rice-Davies-style conclusion that of course he would say/do that. In that first week of May, we won’t just be in the middle of an election campaign; we are going to be right at its sharp end.

If you want cynicism I could easily counter with my own version: speaking in the Down Under vernacular, Lowe shouldn’t be worried about pissing off PM Morrison and Treasurer Frydenberg.

They are not going to be around much longer; at least not on the right (and desirable) side, looking down from the Speaker’s chair.

And I doubt that a PM Albanese and a Treasurer Chalmers, moving across the chamber from the other side, would be any more miffed than their predecessors Rudd and Swan were if we had got a replay of 2007.

No, the reason why he won’t has got nothing to do with politics.

Just as the RBA doesn’t think about the impact on share prices when it’s contemplating rate moves – unlike the inept and debased Fed – it also doesn’t think about what it might do to the shuffling on that (far too plush) green leather.

It is all simply about the RBA’s assessment of the developing dynamics in both the local and global economies.

Very simply, the RBA sees inflation peaking in the March quarter, heading down through the June quarter, then settling cosily – and very conveniently – just below 3 per cent, while the strong economy is taking the jobless rate below 4 per cent to a half-century low.

In short, that we are on the way to the best of all possible worlds – low inflation and very low unemployment – without the RBA having to raise rates a single point from near-zero; and indeed precisely because it doesn’t, so far as the jobless are concerned.

Then this Candidean best of all possible worlds will be sustained through at least June 2024 off only gentle rises in the policy rate – just 65 points this year, and only from August, after inflation had helpfully fallen on its own; and then only another 75-100 points all the way into 2024.

Indeed, looking at the RBA’s latest forecasts, they are almost an economist’s definition of a Candidean best of all possible (fantasy) worlds.

The current high-3s inflation will be down to 3.25 per cent at the end of 2022 and then to 2.75 per cent by June 2023, where it stays (at least) through June 2024.

Even more “successfully”, underlying inflation is down to 2.75 per cent by December, where it also stays unchanged through at least June 2024.

So, inflation is within the 2-3 per cent policy band, but at its high end, thereby maximising the parallel objective of getting the jobless rate below 4 per cent, to 3.75 per cent, by year’s end, where it also settles very conveniently, very Candideanly, all the way through June 2024.

The RBA bases all this on two things.

First, that today’s inflation is almost all supply-disruption driven, and those disruptions will end as the world moves into the bright sunlit uplands of a post-pandemic, living-with-Covid future.

Secondly, that sustained 3 per cent-plus inflation won’t feed wage rises because of the immigration restart once again pouring in students, backpackers and focused visa holders.

So the wage price index (WPI) only edges up to 2.75 per cent by year’s end – actually consistent with even lower inflation than the RBA’s forecasting – then to 3 per cent, and only to 3.25 per cent by June 2024.

The first stop on the assessment of whether the RBA’s “getting it right” is the WPI – admittedly, for the pre-immigration, but also the lockdowns, December quarter – later this month.

It’s also why I suggest the RBA should have kept its March-meeting options open – even, especially, to a gentle 15-point kick-off rate rise. And why its December half failings are relevant and significant.

In August the RBA forecast end-December headline inflation of 2.5 per cent and underlying 1.75 per cent. They came in at 3.5 per cent and 2.6 per cent. The miss was even worse than those numbers suggest.

The RBA was actually forecasting inflation would fall June-half-to-December-half. In fact both headline and underlying leapt and both came in double, for the December half, what the RBA had been forecasting.

Simply, a – gentle – rate rise even as early as March should be “live”, even understanding the RBA’s thinking about immigration and supply chains, with the WPI critical.

Further, the March quarter CPI should be even “livelier”, even if – to quote the late, great Clive James – May week has to be in June.