How will the first official interest rate rise in a dozen years look a week or two before the federal election when the politicians are shouting “cost of living” at each other?
Well, that depends on whether you are the government or the opposition …
On the other hand, how politicised will the Reserve Bank paint itself by delaying a rate rise everyone is taking for granted until the first board meeting after the election?
Not a good look – particularly if a new Labor government thinks you did the Coalition a favour by keeping your hand off the monetary policy lever until after the election.
Such is the political pickle the RBA has got itself into with the timing of increasing the cash rate, a pickle likely to get worse with every statistical release between now and next month’s election.
That was made more obvious on Tuesday with the bank itself nudging and winking that a series of rate rises will start sooner rather than later.
Governor Lowe’s post-board meeting release stated the obvious that “inflation had picked up and a further increase is expected”, but “growth in labour costs has been below rates that are likely to be consistent with inflation being sustainably at target”.
So while headline inflation – the CPI rose 3.5 per cent in the December year with more to come in the March quarter – has the money market expecting and the commentariat demanding higher interest rates, the RBA wants a hard figure for semi-decent wages rises before pulling the trigger.
The quarterly CPI update lands on April 27, the week before the May 3 board meeting, which also will have all the bank’s updated forecasts in the quarterly statement on monetary policy to consider.
But the next wage price index doesn’t land from the Australian Bureau of Statistics until May 18 – the Wednesday after what seems to be the popular tip for the election date, May 14.
Dr Lowe said the RBA will be assessing “important additional evidence” on inflation and labour costs “over coming months”. The commentariat is taking that to mean a rate rise in June.
I think the RBA board just told us they will be raising rates in June.
— Warren Hogan (@_warrenhogan) April 5, 2022
There are decent arguments that wage price index growth will continue to lag – a reason why Treasurer Frydenberg now prefers to talk about the national accounts “average earnings” measure that includes the impact of bonuses and people getting paid more by changing jobs.
It’s another example of Mr Frydenberg cherry picking numbers to suit, but if the RBA is waiting for an excuse to avoid making a decision before the election, the next set of national accounts don’t land until June 1. Convenient, that.
The wording of Dr Lowe’s statement backs him into a corner of requiring some sort of strong wages/earnings growth figure before taking the foot off the monetary accelerator – an accelerator that is flat to the floor while economic and jobs growth are strong and the government is throwing extra billions at the voters for the sake of the election.
The RBA has not had a good relationship with the Morrison/Frydenberg government.
The Treasurer strong armed Dr Lowe into talking up a weak 2019 economy in an embarrassing photo op.
One way or the other, Mr Frydenberg seemed to curtail the most powerful critic of Coalition economic policy.
And then came the Treasurer’s promise of an inquiry into the RBA’s performance, with Labor saying “me too”, as usual.
In this climate, delaying a rate rise judged as both inevitable and needed until after the election may be sniffed as politically weak.
That would be a price to be paid by the governor strapping himself to the mast of significantly higher wage increases that aren’t happening broadly enough.
The RBA has had political trouble with cash rate timing before.
Governor Stevens increased rates during the 2007 election campaign – John Howard did not like that – and Governor Fraser did not cut rates until just after the 1996 election – Paul Keating did not like that.
Governor Lowe will have to hope a new Labor government will be understanding.