Smiles, relief inside the RBA as US slows rate hikes: Robert Gottliebsen

RBA mistakes, including its failure to operate an effective national business intelligence network, has seen Philip Lowe issue gut-wrenching apologies. Picture: Gary Ramage

On the first day of summer, and for the first time in many months, Reserve Bank officials can smile.

In recent days, US bond markets have been signalling that the rapid pace of American interest rate rises was set to slow with the sluggish US economy. But markets can be wrong.

Then, as December 1 dawned in Australia and the Socceroos scored that vital goal, US Federal Reserve chief Jerome Powell announced that he was planning to slow the rate of US interest rate rises.

It was a joyous RBA moment.

The Americans set global rates, so the RBA, in setting our local interest rates, cannot move too far away from what is happening in the US.

If Australia takes its own path, our dollar will be put under pressure, boosting the cost of imports led by oil.

But in the US, Europe and Australia it appears that inflation is topping out, which takes the pressure off interest rates.

But there is a bizarre global warning sign.

One of the factors that has assisted global inflation moderation has been the slowdown in China driven by its Covid-19 clamps and the collapse of major sections of its building industry.

Albeit slowly, China is now taking early steps to try and join the rest of the world in living with Covid-19 and is also boosting its building industry.

One of the forces that helped bring inflation under control has been the sharp fall in the oil price, driven in part by the China slowdown.

Oil and other commodities are starting to regain signs of life in the hope that the China stimulation will gain pace.

For most central banks that is a dangerous sign because if China’s economic activity regains momentum it will boost the price of oil and other commodities and with that rise will come more inflationary pressures.

But in Australia, higher gas and other commodity prices push up the Australian currency, which becomes an inflationary dampener by reducing the cost of imports.

While I don’t have first-hand knowledge, the pressure on the senior economists and other people in the RBA’s Martin Place bunker must now be severe.

Smiles would be rare.

Their mistakes, including their failure to operate an effective national business intelligence network, have seen their boss, Philip Lowe issue gut-wrenching apologies.

An Australian inquiry into the RBA is now underway.

At least before the Powell announcement, Australian markets and leading economists were predicting further significant interest rate rises in Australia.

But Australia’s largest home lender, the Commonwealth Bank led by chief economist Gareth Aird has been telling the RBA in no uncertain terms that if it follows the market predictions the looming downturn will be severe, led by the Sydney and Melbourne housing markets.

The CBA believes that, perhaps for the first time, the RBA people are now listening.

Accordingly, unlike most other bank economists, Aird has been predicting that while next week there would be 0.25 per cent interest rate rise taking the official rate to 3.1 per cent, that would be the peak.

To go further was too dangerous.

The CBA knows, better than anyone else, the large number of Australians who have over-borrowed on their houses, relying on a continuation of low-interest rates.

Nowhere is the danger greater than in the RBA’s hometown of Sydney.

The Powell announcement gives the RBA the opportunity to follow the CBA advice, and it is now at least conceivable that they might not even increase rates next week.

Around Australia there is now a moderation in building costs, Chinese goods are arriving at lower prices than existed some months ago and global oil prices are down from the peak. There is a clear likelihood of a retail fall after Christmas.

On the other hand, the floods are boosting food prices and the demand for higher wages is strong.

The government’s industrial relations policy legislation aimed at boosting union membership is clearly dangerous to national inflation and interest rates.

But the legislation’s complexity may cause it to be bogged in the courts for years, which would moderate wages and give the RBA wriggle room.

The new interest rate sentiment is causing relief for the property market and great joy among bondholders in Australia.

The bond losses have been staggering and greatly contributed to negative returns among superannuation funds that didn’t have unlisted property investments.