The Reserve Bank is gently feeling its way through thick scrub and low cloud, hoping the view on inflation, spending and growth will become clearer over coming months.
Ahead of next week’s federal budget, a mood of uncertainty pervades the central bank’s board, which declared on Tuesday that “the process of returning inflation to target is unlikely to be smooth”.
The RBA is banking on Jim Chalmers, and provincial mendicants, not making the inflation fight more difficult by loosening their purse strings and adding to demand in the economy.
Strap yourselves in Australia, because the RBA board is not backing off, declaring it “remains resolute in its determination to return inflation to target”.
For if inflation does not yield, and does not look like it will be returning to within the target band by the end of next year, Michele Bullock says the board will act and raise interest rates.
Right now, the safe move is to sit still, as the RBA board has since the November cash-rate hike to 4.35 per cent, and ignore the noises in the forest until the picture is clear and the board is confident it can make a decisive move – up or down.
The refrain that runs through the board’s statement on the monetary policy decision is uncertainty. Here’s a taste:
The economic outlook “remains highly uncertain”.
“The persistence of services inflation is a key uncertainty”.
There are uncertainties about the effects of 13 interest rate rises over the past two years.
Plus the RBA is not sure how companies will adjust their prices as the economy slows or how big coming wage rises will be while the labour market remains tight.
The board warns: look beyond our shores and geopolitical uncertainties, including those related to the conflicts in the Middle East and Ukraine, “remain elevated”.
And then the RBA’s money shot: “The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the board is not ruling anything in or out.”
Bullock insists the nation, by and large, is still on the narrow path to low inflation and full employment but now describes the journey ahead as “bumpy, and we should all be prepared for that”.
There are likely to be rogue “data prints” as the pros say, on the labour market and inflation over this year, and the RBA will have to look through the noise and hold its nerve and, obviously, make the right calls at the right time. Margin for error? Tiny.
Economic growth is going to be more subdued than the RBA previously thought, partly because households are cutting back spending and recovery is going to take longer, even with the stage three tax cuts boost.
Rates are expected to be stuck at these levels until mid-2025.
By then inflation would have been above the target range for four years, which is certainly long enough to test the RBA’s credibility and community expectations around price rises.
That would be costly.
“History suggests that it would require more monetary policy tightening and a sustained and costly period of higher unemployment to reset inflation expectations and bring inflation back to target,” the RBA’s quarterly statement warns of the key risks.
If mortgage rates stay higher for longer, or if Bullock pulls the cash rate trigger again, the political heat on Labor will be red-hot.
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