The events of the last week should have every mortgage holder in Australia factoring in a further 50 basis point rise in interest rates in early July, and a few more of the same magnitude in the months beyond that.
Hiring remains white hot, with Thursday’s job market data for May showing a further 60,600 jobs added over the month with a heavy skew to full-time positions, comfortably ahead of the 25,000 consensus. Unemployment remained at a 48-year low of 3.9 per cent, while participation and employment hit respective all-time highs.
The Fair Work Commission also announced 5.2 per cent minimum wage rise this week, and lifted base wages for different industry types in the process, sending a strong signal to the rest of the workforce that chasing big, inflation-fuelling pay rises is now the way forward.
Highlighting the global inflation threat, the US Federal Reserve stepped into the breach to fight off rampaging inflation pressures with a 75 basis point rise in the Fed funds rate, its biggest increase in 28 years.
Those factors combined are enough for the Reserve Bank to start readying its rates gun for a further salvo of rises, adding to the 25 basis points delivered in May, and the 50 basis point increase at the start of this month.
But sealing the deal for a further big interest rate rise in July was the unannounced appearance of RBA Governor Philip Lowe midweek on evening television to tell viewers that the central bank’s forecast for consumer prices to rise 6 per cent in 2022, made just a month ago, is now a forecast of 7 per cent.
The interview revealed the extent to which the RBA now wants to be heard on the mounting risks before the economy. Dr Lowe has a major speech scheduled for Tuesday, but such was his impatience he chose to act early.
What was also notable about the interview is that Dr Lowe has pretty much had a policy of not doing one-on-one media interviews as governor. He has conducted welcome news conferences, but picking out individual reporters to chat about the outlook hasn’t been his style.
By contrast, his predecessor, Glenn Stevens, did interviews with major news outlets regularly. It’s debatable which practice is the better one, as governors are usually restricted to talking only about the bank’s established narrative in interviews, resulting in little news.
Dr Lowe did say early in his term as governor that he would only do such interviews if he had something to say. He delivered on that promise this week.
But there is more going on than meets the eye.
Dr Lowe is clearly responding at speed to a fluid inflation situation that is being stoked by global supply blockages, and rising costs for energy and food. Moreover, interest rates are simply too low, and not just by a little bit, but by a lot.
Beyond all that, there are real world issues in play that go to managing the RBA’s public image.
Before too long the RBA will be exposed to a government review, one it isn’t thrilled about given it will open it up to potentially harsh public scrutiny at the worst possible time.
The government review could be highly critical of the RBA at a time of surging inflation, falling house prices, and a sharp rise in interest rates for the first time in over a decade.
Money market traders are betting the official cash rate will go to 4 per cent by 2023 from 0.85 per cent now. If traders are right, the review of the RBA will be carried out amid a lot of pain in the mortgage sector.
The review could turn into a political circus as opposition and minor parties use the event to grandstand, potentially forcing Treasurer Jim Chalmers to make changes to the operation of the central bank that confuse its mandate, and weaken key tools like its inflation target.
Dr Lowe is now in preparation mode for the review, acting assertively on rates, trying to get ahead of the policy curve, while moving aggressively to reclaim the economic narrative.
His speech next week will underscore that the RBA is prepared to act with force to get inflation under control.
Dow Jones Newswires
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