The Reserve Bank is widely expected to at least reveal its hand on interest rate rises after today’s May monetary policy meeting.
The meeting will come after market yields on 10-year Australian bonds hit a silly 3.24% on Monday, according to Bloomberg data.
That’s the highest they have been since November, 2014 as local bond investors fret needlessly about inflation here and wrongly compare our situation to that in the US, UK and Europe, without first making a valid comparison.
It’s this blinkered thinking (and the election campaign) that has triggered the orgy of speculation about the RBA meeting today.
Some economists and business analysts reckon there will be a rise, others that there won’t be a rise, more a statement of intent – after all there’s a federal election campaign out there and as independent as it is, a central bank doesn’t like becoming a political football – it already had that experience in 2007 by raising rates during an election campaign.
So who wants a rate rise? Former board member and Canberra-based economist Warwick McKibbin says the rate should rise to 0.50%.
Three of the big four banks reckon a rate rise will happen today – the Commonwealth Bank thinks it may happen at the June meeting after the release of Wage Price Index figures for the March quarter just before the May 21 poll.
The AMP’s Shane Oliver says today and it could be 0.15% or 0.40%.
Paul Bloxham, a former RBA economist, now in the private sector at HSBC bank, reckons there won’t be an increase today and thinks the central bank will wait for the wages data. He also thinks the election campaign makes it tough to announce a rate rise. His is all about timing, he believes there should be rate rises (they all do).
But not Ross Gittins, economics editor of the Sydney Morning Herald. He doesn’t see a need for a rate rise and that Australia doesn’t really have an inflation problem compared to countries like the US.
“The claim that the inflation genie is well and truly out of the bottle is predicated on the assumption that all the advanced economies have identical problems for the same reasons and at the same time,” he wrote on Monday.
He thinks too many economists are living in the 70’s and 80’s when the economy was very different and unions more powerful.
“The first thing to understand is that our price rises have come predominantly from shocks to supply: the various supply-chain disruptions caused by the pandemic, the war on Ukraine’s effect on oil and gas prices, and climate change’s effect on meat prices.“Various economists are arguing that price rises have been “broadly based” so as to show that price rises are now “demand-driven”, but the main reason so many prices have risen is that there have been so many different supply shocks coming at the same time, with so many indirect effects, ranging from transport costs to fertiliser and food,” Gittins wrote in the SMH on Monday.
Our consumer price inflation is much lower than NZ’s, as well as that in the US, Europe and the UK.
And unlike those countries and China, Producer Price Inflation (a measure of the cost pressures industries from miners to retailers face) in Australia rose an annual 4.9% in the March quarter against the 5.1% rise in the CPI (annual).
China’s PPI was an annual reading of 8.3% – the CPI was 1.5%. The US CPI was 8.5%, the PPI was 11.2% on a final demand basis (as are all the other readings. The UK CPI was up 7.1% in March, 2022, the PPI rose 11.9%.
On that comparison we do not have a problem with inflation – yes, we have higher prices, but our economy is as exposed to world trade and prices as those economies cited above, and yet our two main readings show a slower rate of growth in cost pressures, even with fuel costs (the main driver in most economies in the past year) up 35%.
Our home energy costs have risen much less steeply as those in the US, Europe and the UK. Europe and the UK (and China) had a gas and energy supply crisis and high prices from autumn 2021, Australia didn’t.
Australian electricity prices are starting to rise here because thermal coal prices have jumped especially after February 24 and the Russian invasion of Ukraine) while LNG (gas) prices rose in late 2021 on China’s power rationing crisis, eased and then bounced after the Russian invasion and start to a slow embargo on Russian oil and gas.
LNG prices have fallen by a third in the past few weeks ahead of the move to cut gas supplies to Poland and Bulgaria and the looming decision by the EU to start reduce the import of Russian oil and gas.
