Treasurer Jim Chalmers’ ‘magic wand‘ to get inflation down in the Budget is on track following RBA testimony to Parliament last night. Michael Pascoe reports.
There’s a problem for the interest rate hawks demanding more pain for mortgage holders: the Reserve Bank has bought Jim Chalmers’ downward massage of the consumer price index.
The RBA’s economics assistant governor, Sarah Hunter, said on Thursday the bank “broadly agreed” with Treasury’s forecasts of the impact of the budget on the CPI.
That means buying the Treasurer’s prediction that the CPI will be under 3 per cent this year and 2.75 per cent for the new financial year.
RBA’s Sarah Hunter
Accepting that the CPI will be within its target range would make it rather hard for the RBA to hike rates again, despite the urging of the well-paid economists who believe mortgage holders need to be made suffer even more. An inflation rate starting with a 2 would call for a rate cut before the RBA induces a hard landing.
This week’s retail sales figures add to the miserable picture of consumers retreating into their shells, either through the necessity of simply running out of money or the spreading mentality of “cost-of-living crisis” and the promise of higher unemployment as official policy has its way.
Dr Hunter repeated the RBA chant of inflation still being too high and inflation being the bank’s absolute focus.
The reality of the key inflation drivers is that they don’t respond to interest rates. Insurance premiums and still-surging rent are immune to the pain the RBA inflicts.
The RBA knows this, and every now and then, a governor will admit the frustration of their impotence.
Michele Bullock did as much in her answer to the final question of her media conference earlier this month when she was specifically asked about that frustration.
“My only thought on it is that it is the only thing we have,” she said.
“To my mind, the governments are saying the right things in trying to make sure they try not to add to inflation. As I’ve said, they have got their own particular issues to balance, policy issues to balance but they are saying the right things.
“It’s the same around the world. Central banks, with their interest rates, do tend to be the first port of call for affecting inflation because we have an impact on demand. We can’t impact supply. Everyone is very conscious it’s a blunt instrument, it works through particular channels and that does have different impacts on different people. But it’s a fact of life. It’s what we’ve got.”
And – failing more direct government action – what a minority of the population is belted with.
Accepting the government’s efforts to directly lower inflation – most obviously by reducing what consumers have to spend on energy – puts the RBA a step ahead of the market economists’ commentariat.
Though hawks squawk
The hawks continue to squawk about what they perceive as the underlying inflation rate and disregard the direct intervention that starts on July 1.
They also disregard the RBA’s observation that the last two interest rate rises have not made their way through the system yet. Mortgage repayments were taking 10 per cent of total household disposable income this month, but the RBA sees that rising to 10.5 per cent by the end of the year – if rates are held steady.
The government’s great hope is that the comatose consumer will be revived by the Stage 3 tax cuts without going overboard. The consumer needs reviving before the present fear becomes self-fulfilling.
The tax cuts won’t be enough to get renters and those with large mortgages out spending again on anything more than necessities, but recent surveys point to even people with the capacity to spend suggesting they are more likely to save.
The Conversation’s Peter Martin makes a more optimistic case for the impact of the national wage case and tax cuts, but it would be a brave soul to predict an outbreak of optimism without the flag of an interest rate cut by the RBA.
The next “live” meeting will be August with a new set of forecasts and richer data to consider than the monthly CPI guess that had the monetary hawks wetting themselves this week.
It also could be a new-look board – another wild card.
Jim Chalmers’ Budget face saver for the RBA on inflation – voters too
Michael is a journalist, commentator, speaker and contributing editor for The New Daily.