Reserve Bank governor Philip Lowe took out his blunt instrument on Tuesday and smashed speculation about interest rate rises starting next year.
He then produced a shotgun from under his desk to blast any bits still quivering and, just to be sure, he ordered that the scattered remains be buried under another $100 billion he is having printed for the occasion.
Brandishing a turbocharger he is having fitted to the money-printing machine, he wrapped up the RBA’s first board meeting of the year by saying: “I promise rates will not rise before, at the earliest, 2024 – cross my heart and hope to die, stick a needle in my eye.”
Has everybody got that now? Interest rates are not for lifting.
OK, maybe he didn’t do the turbocharger thing or cross his heart, but there were other things he didn’t say in his post-board statement that were nonetheless there between the lines if you know where to look.
- The RBA has no choice but to keep interest rates nailed to the floor because it will be fighting tighter fiscal policy as the government cuts its spending
- Living standards for ordinary folk will fall for the next few years as real take-home wages growth remains negative
- The rich will get richer through asset price inflation courtesy of the aforementioned interest rates.
And that is all despite Dr Lowe putting on a brave face with quite optimistic forecasts for Australia’s economic growth over the next two years.
The bank’s “central scenario” is that GDP will grow by 3.5 per cent over this year and next and that unemployment will be “around” 5.5 per cent at the end of 2022.
Both are rosier forecasts that The Conversation’s economists panel looks to, which tips GDP growth of 3.2 per cent this year, 2.8 per cent the next and unemployment still being above 6 per cent in December 2022.
What matters most for the RBA though is the expectation that wages growth and inflation will remain below 2 per cent “over the next couple of years”.
“The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range,” Dr Lowe concluded.
“For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. The Board does not expect these conditions to be met until 2024 at the earliest.”
Let me underline that inflation doesn’t just have to be in the 2- to 3-point target range before interest rates rise, but it has to be “sustainably” there – meaning there for quite a while.
Without strong wages growth, there is not a scenario on offer that will achieve that sustained inflation. As previously explained in this space, spare labour and the government policy to suppress wages make the RBA’s desired strong wages growth very hard to attain.
Meanwhile, real take-home wages going backwards means weaker consumption at the same time the government is reducing its contribution to growth – a vicious cycle.
No wonder the RBA is blunt about its intentions and is upping the money printing.
The governor will no doubt have more to say when he speaks at the National Press Club on Wednesday and before the House of Representatives economics committee on Friday, when the RBA’s more detailed quarterly statement on monetary policy will be published.
The economics committee performance – a competition by all sides of politics to bend the RBA’s words to suit themselves – promises to be more strained than usual.
Asset price inflation was specifically recognised by Dr Lowe on Tuesday.
“Financial conditions remain highly accommodative, with lending rates for most borrowers at record lows and asset prices, including housing prices, mostly increasing. Housing credit growth to owner-occupiers has picked up recently, but investor and business credit growth remain weak,” he said.
Combined with the strength of his interest rates comments, the above paragraph means the bank is prepared to let housing prices rip from a monetary policy point of view. (Though the fundamental of weaker population growth is hovering somewhere as a potential retardant.)
It’s worth remembering that it was the RBA’s policy and hope pre-COVID that cheap money would spark rising housing prices that would encourage more building and deliver the “wealth effect” to encourage broader consumption. Nothing has changed there.
The surge in housing finance and prices has driven the recent speculation about the possibility of an interest rate rise sooner than the RBA had indicated. The Conversation’s panel bravely forecast mid-2022.
But it’s unemployment and inflation that are the RBA’s main concerns, not housing prices, even if they start to bubble. If bank lending for housing becomes too loose for comfort, APRA’s macroprudential tools can be brought to bear again.
So in light of the federal government tightening fiscal policy, sharply cutting back its contribution to economic growth in the next couple of financial years, the RBA is encouraging investors and speculators to get stuck in.
That’s great for those with the means to do so – those who already have the required equity and secure income necessary to borrow – but it’s a sure-fire way to worsen wealth inequality given the quarter or more of the population without the means to climb on board and who, therefore, end up further behind.
What’s more, for those with the cash to spare, any eventual rise in interest rates is likely to be very slow and slight. Given the jump in household debt levels being encouraged, even mandated, it should only take a little rate nudge to scare the horses.
The RBA’s years of cutting rates to unsuccessfully drive strong growth have shown monetary policy has lost its traction on the way down, but it will have plenty on the way up, should that happy day come.