Reserve Bank governor Philip Lowe’s speech on inflation yesterday was drafted well ahead of Scott Morrison’s comments about how the Coalition would keep interest rates lower than Labor. Indeed, much of the monetary policy content of the speech was a repackaging of Lowe’s media conference on November 2 and the minutes of the RBA board meeting of that day. So he can’t be accused of being political in his comments.
Nonetheless it pointed to a stark distinction between the adults in the room of economic policymaking in Australia and a desperate prime minister looking for a scare campaign.
Morrison’s accusation is that Labor will somehow force interest rates higher than they should be — presumably by spending an even bigger proportion of GDP than the 26-27% Morrison is spending, or by managing the economy more successfully so that growth picks up quicker.
But Lowe’s point is that interest rates will go nowhere until wages growth is up in the 3% range and forces inflation sustainably up above 2%. And they’ll go nowhere despite the conniptions of bond markets, the commentary of inflation hawks and the demands of neoliberals in places like The Australian Financial Review.
Just to make it absolutely clear, Lowe waited right until the end of the speech, and said: “I would like to repeat a point I made a couple of weeks ago — that is, the latest data and forecasts do not warrant an increase in the cash rate in 2022. The economy and inflation would have to turn out very differently from our central scenario for the board to consider an increase in interest rates next year.”
How’s that for clarity, bond bunnies, and an implied rebuke of a prime minister warning that rates will go up under Labor.
Lowe and the bank are unfazed about current inflation levels. He walked through what’s driving inflation in Australia compared with the rest of the world, pointing out commonalities and differences. An important point was that the pandemic and its aftermath have posed a fundamental challenge for what has been a default setting in global manufacturing and logistics for decades — just-in-time supply chains that rely on low inventories but time-effective distribution. These proved vulnerable to the impacts of the pandemic, and to the volatility in demand caused by lockdowns and their ending.
But Lowe also explained that that volatility means the current high levels of demand — from consumers spending money saved during the pandemic — is likely to return to normal as those reserves are exhausted, and the shift in consumption during lockdowns — from services to goods — is likely to revert as well, relieving demand-side pressures.
As opposed to the United States and the UK, where labour market pressures are driving big wages growth which could well feed into inflation, in Australia we’ve seen no such growth.
Lowe understands something bond markets and the AFR do not: that as households’ lockdown savings are exhausted, and with no expectation that wages will rise, consumers will cut spending again. In Lowe’s view, it was likely wages growth needed to be above 3% to get inflation back to the middle of the RBA’s 2%-3% target band.
“We are using wages growth as one of the guideposts in assessing progress towards our goal and whether inflation is sustainably in the target range,” Lowe said.
Even then, “this, by itself, does not warrant an increase in the cash rate. As I have said, much will depend upon the trajectory of the economy and inflation at the time.”
Maybe that’s what Morrison is warning Australians about — that Labor might lift wages growth above 3% for the first time in a decade, prompting the RBA to finally lift rates.
To underline his contention that Morrison is talking twaddle (again) Keane quotes Lowe saying “The economy and inflation would have to turn out very differently from our central scenario for the board to consider an increase in interest rates next year.”
But this can be squared with Morrison’s dire warnings. Picture this: Labor wins the next election; the economy roars into life; employment booms; and wages pick up dramatically, with consequences for inflation. This would fulfil Lowe’s conditions for an interest rate rise. In effect, Morrison is warning us that a Labor government would, more or less instantly, fix the economy and boost wages. What’s not to like?
Ah, I see Keane reached something like the same conclusion by the end of his piece.
Yes, I’ve always loved the voodoo/economist term ‘overheating economy’ which usually means more workers needed who are then able to demand pay rises.
Can’t be having with that – next thing they’d be wanting indoor plumbing…
Shorter Scummo. Profits up = good, wages up = bad
Yes, but how does Morrison sell the idea of lower wages to the 15 million or so wage-earners, as opposed to the 50 thousand or so business owners that hire employees? You can see where most of the votes are.
We have lots of turkeys voting for Christmas. The amount of times I’ve been berated by someone on a low wage, with no prospect of a raise under the Liberals,. telling me they would never vote for Labor, because apparently they are at fault despite not being in Government. I think part of the thinking is that they have swallowed the lie that if only they work hard enough they can become part of the monied class, and don’t want to lose all the benefits they see the monied class have.
‘SCARE CAMPAIGN’ – you mean a LIE CAMPAIGN designed to deliberately mislead voters.
I seem to recall it was Joe hockey who stated during the GFC when the Reserve Bank dropped the official rate from 2.75%to 2.5% that the drop in the official rate was because the Reserve Bank had to step in to do the then Labour government’s job to stimulate a deeply troubled Australian economy.
My, how the perception changes when the boot is on the other foot and it’s a Coalition government that, on its watch has seen the same Reserve Bank drop the official rate from 2.5% to zero% along with other drastic measures well before Covid hit the scene.
It seems, based on Bloated Joe Hockey’s assumptions, the Reserve Bank has been working its arse off stimulating an economy that was much worse off than the one the Coalition inherited from Labor back in 2013. An economy that went into steep decline under the Abbott/Turnbull/Morrison government’s eight-year stewardship which is even more proof that the LNP’s “better economic managers” tag was always a myth that’s no longer believable.
A point of interest in Bernard’s “Lowe pulls rug out from under Morrison’s . . . . campaign.”
Informs that RBA skillfully, maintaining public interest responsibilities as a RBA priority. Whereas, so many other ‘arms’ of federal governance, capitulated long ago?
Since we have global money printing (QE), the time inflation goes up globally comes when all national banks are saturated with bonds on the balance sheets. The Weimar republic was a national money printing exercise, and therefore inflation appeared faster, Investors already choosing land and real estate above shares. I find QE something akin to climate change. Deny inflation exists by excluding items in the “basket”. Deny co2 warms up the planet.
No, the Weimar republic was a shortage of resources issue which led to demand inflation, which therefore required money printing! Money does not cause inflation, excess demand for resources in short supply does. Learn MMT.