Reality check: rates will be higher for longer

The RBA kept interest rates on hold. Picture: John Appleyard/NewsWire

Interest rates will be higher for longer because vote-hungry government spending splurges, rising home prices, stagnant productivity and persistent population pressures are stoking demand in the economy.

The nation’s monetary officials have provided a reality check for the flighty herd rushing to a rate cut as well as the doves in policy land who believe the fight against heavyweight inflation is more or less over.

Back up, because the hawks have swooped back into the picture for interest rates.

Michele Bullock declared there would be no near term easing from the current restrictive policy setting and that the monetary guardians seriously considered the case for the 14th hike in the cash rate in this tightening phase that began in May 2022.

On Tuesday, the Reserve Bank board held the cash ready steady amid the global financial market turmoil of recent days but is clearly worried about the stickiness of inflation, Australia’s abysmal productivity performance and a too-tight labour market.

“The economic outlook is uncertain and recent data have demonstrated that the process of returning inflation to target has been slow and bumpy,” the RBA’s board statement said, adding that underlying inflation has been above 2.5 per cent for 11 consecutive quarters.

Inflation is going to be estranged from its intended target for a whole lot longer, thus flirting with the warning from former RBA chief Philip Lowe who said such a sustained failure would see the community ask of the board “are they serious?” about their day job.

But even with all the hits consumers have endured, the central bank believes the economy still can’t supply the amount of goods and services desired and that, along with stagnant productivity, high labour costs present a material danger to the inflation outlook.

In fresh staff forecasts published in the quarterly Statement on Monetary Policy, the RBA’s economists said underlying inflation is expected “to ease more gradually than previously anticipated, falling below 3 per cent by late 2025 and approaching the (2.5 per cent) midpoint of the band in 2026”.

The scene is now set for an almighty tussle between the bank’s board and politicians facing voters over the coming year, as the so-called “headline” rate of inflation slips inside the 2-3 per cent target band due to energy rebates and rent relief, while the measure known as the “trimmed mean” remains elevated.

There will be harsh words, finger pointing and no political prisoners.

The RBA estimates that in the current September quarter government policies to provide cost of living relief to households will mean the attention-grabbing measure of consumer inflation will be 0.75 percentage point lower than underlying inflation.

As cost relief policies subside, headline inflation is expected to blow out to 3.7 per cent by the end of next year, while the core measure will be 2.9 per cent.

Rising wealth, ongoing strong migration, wages growth, tax cuts, falling inflation and a robust job market are behind the RBA’s chunky upward revision to forecast economic growth in the year to June next year: from 2.1 per cent to 2.6 per cent.

Public demand, which includes spending on public servants’ wages and capital works, is forecast to grow by a staggering 4.3 per cent in the year to December, almost three times the 1.5 per cent rate the RBA was expecting before the latest round of expansionary federal and state budgets.

“Inflation in underlying terms remains too high, and the latest projections show that it will be some time yet before inflation is sustainably in the target range,” the RBA board’s statement said.

“Data have reinforced the need to remain vigilant to upside risks to inflation and the board is not ruling anything in or out.

“Policy will need to be sufficiently restrictive until the board is confident that inflation is moving sustainably towards the target range.”

Got that?

At her press conference, Bullock’s parting message was about vigilance: doing what is necessary to get inflation back to target.

That means not ruling anything in or out, that is hikes or cuts, even if that means slipping off the “narrow path” and succumbing to job losses and a recession.

Markets may have lost their minds, but in the real world, the grind and groans are with us for longer than many of us were expecting and can bear.