Reserve Bank rate hike: good decision, bad timing

The central bank’s move to raise rates makes sense, but it’s timing is terrible with just weeks until the federal election on May 21.

RBA governor Philip Lowe says he knows its rate hike decision would be ‘unpopular’, but ‘we do what we think is right for the country’. Picture: Jeremy Piper/NCA NewsWire

After not delivering a rate hike through his entire career as governor stretching back to 2016, consider Phil Lowe’s timing: an increase two weeks after consumer price data showed the inflation genie had well and truly escaped the bottle, and two weeks short of an election.

Too late, and too early, by turn – this is a decision that will attract plenty of criticism.

Nonetheless, it’s a decision that needed to be made.

Dr Lowe had been walking an increasingly precarious tightrope of weighing the risk of letting inflation get out of hand, against the “historic” reward of achieving full employment.

The inflation data on April 27 was the tipping point.

The mix of very low unemployment and the easiest monetary policy settings in history was unprecedented.

Add in the strongest consumer price growth since the introduction of the GST, and the RBA’s stance became unsustainable.

Lowe on Tuesday revealed new forecasts for inflation to hit 6 per cent this year, from 5.1 per cent over the year to June. And that’s factoring in further rate hikes.

The decision might be the right one, but it will still deal a big blow to the central bank’s credibility.

After all, it was as recently as November last year that Lowe was still saying rates would be on hold for a further two years.

Forecasting during a pandemic is devilishly hard, and since then there has been a war in Europe that has sent commodity prices soaring.

But the inability of the country’s finest economic minds only six months ago to even conceive of an inflationary outbreak that could potentially require a rate hike before 2024 has to be considered a failure.

Households with a mortgage now will have to deal with climbing borrowing costs, alongside a further lift in the price of groceries and still-high petrol prices.

It’s an ugly mix, but this was always what was going to happen the moment Lowe joined his peers overseas in saying they would wait until inflation had arrived before moving against it.

The saving grace, as Josh Frydenberg was quick to point out after the hike, is the RBA is raising rates because the economy is doing so well.

Wages are on their way up, Lowe says, and unemployment is predicted to fall another half a percentage point to 3.5 per cent.

There are more rate hikes to come this year, Lowe has made that clear, perhaps as early as next month.

The economy, and households, should be strong enough to ride it out.