Election 2022: Looming poll no issue in RBA’s call to go up

RBA governor Philip Lowe on Tuesday. Picture: Louie Douvis

The decision by the Reserve Bank to lift the cash rate by 25 basis points to reach 0.35 per cent demonstrates that the governor and the members of the board take their independent status seriously.

The fact that the federal election is less than three weeks away didn’t put them off hiking the cash rate – which will quickly flow into market rates – even though last month the bank had told us that the figures on wage growth were crucial. (The Wage Price Index for the March quarter will be released on May 18.)

The guidance released at the same time also points to further hikes in the cash rate to deal with inflation. Mind you, the bank was giving very different guidance quite recently when the governor claimed that the cash rate would probably not be adjusted upwards until 2024. It’s been a bit confusing for markets and mortgage holders. The bank’s balance sheet will also take a significant hit.

With a mandate to keep inflation between 2 and 3 per cent on average (using the trimmed mean of the CPI), the expectation is that the bank will always be forward-looking; anticipating inflationary pressures before they actually become apparent in the official figures (which are backward-looking).

Along with many central banks, the Reserve Bank dropped the ball by hoping that inflation was temporary, caused by supply-side disruptions associated with Covid. Too much attention was paid to getting wages up – which is not actually a direct objective of the bank – and basking in the glow of an economy at close to full employment.

To run with an emergency cash rate when the economy was clearly at close to full capacity will doubtless be regarded as a mistake in due course. At this juncture, it is both unpleasant news for those holding debt as well as a government trying to stay in office. The alternative would have been for the bank to start to adjust the cash rate some time ago.