McCrann: RBA should and probably will leave rates on hold

Wednesday’s inflation data has left the RBA with some thinking to do ahead of next week’s meeting, but for me the decision is clear.

RBA governor Michele Bullock. Picture: NewsWire / Nikki Short

The Reserve Bank should and probably will leave its official interest rate unchanged at its meeting next Tuesday.

Inflation for the year came in exactly as the RBA had predicted.

Yes, that was a still too-high 3.8 per cent - still significantly above the RBA’s targeted 2-3 per cent.

But, very, very importantly, the underlying inflation rate - the inflation the RBA really focusses on - actually eased.

It came down from 1 per cent in the March quarter, and 4 per cent for the March year, to 0.8 per cent for the quarter, and 3.9 per cent for the June year.

It might seem tiny, but if we annualise the quarterly number, underlying inflation fell from a 4 per cent annual rate in March to a 3.2 per cent annual rate in June.

No, the RBA certainly could not declare “inflation beaten”.

But it even more certainly could not say: inflation’s heading in the wrong direction and we have to hike.

Backing this up, the RBA has left its official rate unchanged through the last five meetings, despite predicting inflation would stay around these levels through the June quarter.

So why would it hike when it got the inflation outcome it had been predicting; and had been prepared to ‘accept’, so to speak through those meetings?

Most critically, a hike now would threaten to throw the economy off the “narrow path” the RBA has been trying to stay on, all the time Michele Bullock has been governor, and back through her predecessor Philip Lowe.

This is to keep inflation coming down - with both her and Lowe accepting that it would take until 2025 to get it back below 3 per cent.

But at the same time not throwing the economy into recession, sending businesses broke and the jobless rate rocketing.

Indeed, the economy has actually been in a per capita recession for over a year - with overall growth in the economy being driven by the massive levels of immigration.

And there are now very clear signs that the jobless rate could go from slowly edging higher - last month, to 4.1 per cent - to surging towards 4.5 per cent and higher.

Very importantly, although the changes have yet to be official legislated, Bullock’s RBA is now operating under a dual mandate.

Yes, keep - right now, get - inflation in the 2-3 per cent range. But also, to keep as close as we can to full employment.

A jobless rate heading towards the mid and high-4s would threaten that ambition.

A rate hike now could do exactly what Bullock doesn’t want - throw us off her “narrow path”, which she has ruefully admitted has been getting “narrower”.

Yes, the underlying annual inflation rate - the one the RBA most focusses on - came in higher than predicted.

But only just, at 3.9 per cent as against the 3.8 per cent RBA prediction. And importantly, not sharply above the headline inflation rate.

And that quarterly number of 0.8 per cent - just 3.2 per cent annualised - would be critical in Bullock’s thinking.

Originally published as McCrann: RBA should and probably will leave rates on hold