A big surge in inflation in the March quarter will place the Reserve Bank of Australia (RBA) under enormous pressure to follow its 2007 precedent and lift rates next week in an election campaign.
Annual inflation hit 5.1% after a higher-than-expected 2.1% rise in inflation in the three months to March. Inflation is now at its highest levels since the introduction of the GST more than 20 years ago, driven by rises in housing costs, fuel costs (which will start abating following oil price falls in recent weeks) and tertiary education.
The Australian Bureau of Statistics pointed out that supply chain issues are now having a real effect on inflation. “Continued shortages of building supplies and labour, heightened freight costs and ongoing strong demand contributed to price rises for newly built dwellings… Notable rises were also recorded across the food group (+2.8 per cent), reflecting high transport, fertiliser, packaging and ingredient costs, as well as COVID-related disruptions and herd restocking due to favourable weather.”
The RBA’s preferred measures, the trimmed mean (3.7%) and weighted median (3.2%), were both above the its target inflation band of 2-3% and seem to remove any doubt that the RBA will move quickly to lift interest rates — and potentially by significant increments. Whether it does so at its next meeting, on Tuesday, looms as a key test of the RBA’s independence. A rate rise will inflict massive damage on the Coalition’s claims to being the superior economic manager.
The 2007 election rate rise generated more than a decade of ill will in John Howard, Peter Costello and parts of the Liberal Party, which is still showing up in the demands for a “review” of the central bank.
How does Australia’s inflation compare internationally?
The US reported a headline rate of 8.5% in the year to March, the highest since 1981, rising from a 7.9% rate in February. Month on month, the rate was up 1.2% and the core rate was an annual 6.5%. The Federal Reserve has already raised its key rate by 0.25% and will add at least a 0.50% boost to that next Wednesday.
Across the Tasman, the Reserve Bank of NZ (RBNZ) has already lifted rates three times — the last being a 0.50% boost, and that was before the CPI rose a headline 6.9% up from 5.9% in December. The quarter on quarter rise was 1.8%. That inflation data was released after the last RBNZ decision, so another rate rise is tipped next month.
The UK annual rate was 7% in March (and the OECD rate was 7% in February). The UK lifted its key Bank Rate 0.25% in March to 0.75%, the third rate rise (like the RBNZ) and the rate is now back to pre-COVID levels.
Euro area consumer inflation rose to a headline rate of 7.4% in March, the highest since the euro was introduced in the early 1990s and up from 5.9% in February. Month on month, the rate rose 2.4% thanks to the impact of higher energy prices from Russia’s invasion of Ukraine.
China is the outlier: its headline inflation rate is 1.5%, up from 0.9% in February. China’s core rate was 1.1% in March, unchanged from February, so there is no rate rise on the horizon, given COVID infections and the brutal government reaction pushing the economy towards a recession.
Canada’s inflation rate jumped to 6.7% in March, up 1% from the 5.7% rate in February while core inflation rose 5.5%. The Bank of Canada lifted its key rate 0.50% to 1% in April and, like the RBNZ, is seen as lifting rates again in May.
Next Tuesday afternoon at 2.30pm has suddenly become one of the most important moments in the election campaign.
If the RBA doesn’t move at its May meeting it will demonstrate how cowed it is by the government. Or partisan – hard to tell.
Better to offend a tired government on the way out, than a fresh government on the way in!
“Next Tuesday afternoon at 2.30pm has suddenly become one of the most important moments in the election campaign.”
Or, if things were done rationally, the RBA would always conduct itself with total indifference and disinterest about any election that may or may not be under way. Anything the RBA does or does not do under the influence of such considerations is blatant and improper partisan political interference.
At 4pm Wednesday I checked Fixed Term rates which have been under 1% for the last year or more, with no difference between 1-5yrs.
They now range from 1.4 to 2.5% – a massive change in just the last week.
Never mind the RBA, watch the hot money screen jockeys sweating.
PS I meant rates offered by government guaranteed banks, not scam artists.
But . . . what would raising interest rates do to reduce inflation?
All the sources of inflation that we’re seeing are due to supply chain and related issues, or due to imported price rises from elsewhere in the world – raising rates will do nothing to mitigate those price rises. In fact, raising the cost of borrowing will make it more expensive for businesses and consumers to invest in things that might mitigate the impact of those prices rises – improvements in fuel efficiency of transport, for example. If those investments would even be possible, given the broad supply issues at the moment.
It seems like a really stupid way to respond to the current inflationary event . . .
Good points, though all that quantitative easing was also bound to overshoot and now the factors are all coming together. All in all monetary policy has been required to do far too much macroeconomic management. I think it is too blunt to respond well to the delicacies you raise. All not helped by having lazy and incompetent fiscal management by the Coalition, that has even been directed at undermining monetary policy.
For example, the Reserve Bank was seeking gradual reinflation over the past four years through wage rises, not price rises. These would have fed into pressures on firms for productivity improvements to maintain profitability. But the Govt was hellbent on suppressing wages, staying weak on infrastructure investment and improving company profits share of the economic growth. Now, with external inflation pressures flowing into the economy, everything risks going sideways and down. Way to go better economic managers…
Alan Kohler posted a graph on ABC Insiders program last weekend showing rate of productivity improvement peaked in 2013 and has sagged since (under Coalition).
Thanks for that. I would maintain that in Australia’s underdeveloped economy, characterised by oligopolies and internal market focussed firms, wage rises are almost the only stimulus to productivity growth. Another alternative would a serious competition regulator and anti trust legislation. However no Australian government, despite any lip service they pay to free markets, has the guts for that.
“Whether (the RBA) does so at its next meeting, on Tuesday, looms as a key test of the RBA’s independence.”
Yes, in our dysfunctional monetary system, in which the legal currency-issuer is forced to tax or borrow from the private sector.
But the electorate, not the RBA governor, should determine fiscal policy, while monetary policy should be set at zero. (See MMT).
Just sayin’. ….
Intrigued.
China is the outlier: its headline inflation rate is 1.5%, up from 0.9% in February. China’s core rate was 1.1% in March, unchanged from February, so there is no rate rise on the horizon, given COVID infections and the brutal government reaction pushing the economy towards a recession.
Interesting conclusion, but I am not entirely convinced this will be the way it pans out.
I would presume that given the Dutton approach (China Bad, China Bad to the tenth fold and similar policies coming out of USA) then there is a reasonable possibility that will force China to move to a closer economic (military) relationship with Russia.
Sounds like the west wants another cold war.
Where will states like India and Pakistan etc. line up in this new cold war.
In my opinion Ukraine could have been avoided – all those lives lost and human deregulation just to keep the smug look on western hawks faces. Will it continue to flow to the exotic heights of economic rapture as the arms manufacturers (The pseudo governments of Australia and the USA) make their billions.
Ambers stories make my heart bleed, and so they should. Why do we encourage this form of inhumanity. Particularly evidenced by the lack of coverage in countries undergoing similar atrocities but with brown skinned populations?
An actor who played a president in a TV series got the chance to do similar in real life? “A hero who leads his country against oppression ” – rather than sitting down and talking and negotiating?
A quarter of his population are now refugees and growing and many of his cities destroyed. Now would the situation have been different if a professional politician had been president?