Please make it stop. That’s what Michele Bullock must say to herself after RBA board meeting days, when journalists conjure a dozen different ways to ask the same question — what’s going to happen with interest rates?
At his third regular post-meeting press conference, a more relaxed and self-assured RBA boss found a dozen different ways to politely say, I don’t know.
But, amidst all the uncertainty, there was a clear message from the governor, exactly two years on from the Reserve Bank’s first rate hike of the current cycle.
“I hope that we don’t have to raise interest rates again. Having said that, if we think we have to, we will,” she said.
It confirms what many of us have long suspected — the RBA is an unwilling hiker.
There are plenty of cheerleaders — mainly from sections of the economics profession, including no doubt many within the bank’s own research department — urging it to go harder.
And it’s not that the RBA board didn’t think about raising rates this month, as Bullock confirmed in his press conference.
But, as stubborn as inflation is proving to be, there’s a very good reason why the RBA’s leadership is exercising caution.
“What we are really trying to do is slow things enough to bring inflation down without tipping the economy into recession,” Bullock said.
It’s what was dubbed by her predecessor Philip Lowe as “the narrow path”.
And the RBA’s latest quarterly forecasts show Australia is perilously close to falling off that path. Indeed, some unfortunate souls are already tumbling down a canyon of debt.
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Consumers are responding… but inflation isn’t
The RBA trimmed its forecast for GDP — the key measure of economic output — to just 1.2 per cent for the year to June.
But it would have been much worse if not for a massive upgrade to “public demand” — federal, state and local government spending.
The biggest part of the economy, about 60 per cent, is household consumption and it’s now forecast to edge just 0.1 per cent higher over the year to June.
The RBA expects population growth to be about 2 per cent over that same period, so that means the average Australian is buying a lot less than they were a year ago.
Australian Bureau of Statistics (ABS) figures out just ahead of the RBA decision backed up this forecast change, showing retail trade volumes down 0.4 per cent in the March quarter.
That’s the fifth time out of the past six quarters that we’ve bought less stuff, and on a per-person basis retail volumes have been falling for an unprecedented seven straight quarters.
“It tells us that consumers are responding to higher interest rates in the way we expect them to, which is in cutting back demand,” Bullock observed.
“And what we know is that they’re cutting back on discretionary expenditure.
“They’re doing things like they’re downgrading, they’re going to perhaps budget versions of things they might ordinarily buy more expensive versions of, the basket sizes are getting smaller.”
The RBA is hammering what it can to fix what it can’t
In short, interest rates are doing what they claim on the sticker, reducing demand and slowing the economy.
That’s just not feeding through to price falls as much as the bank would like it to.
Perhaps that’s not so surprising when the cost of things we need to buy rose two and a half times as fast as the cost of things we like to buy.
The March quarter Consumer Price Index showed a 0.5 per cent rise in the cost of “discretionary” goods and services, but a 1.3 per cent jump in non-discretionary goods and services.
The main culprits last quarter were rents (+2.1 per cent), secondary education (+6.1 per cent), medical and hospital services (+2.3 per cent), pharmaceuticals (+7.1 per cent), child care (+3.9 per cent) and insurance (+3.7 per cent).
If rate rises cause households to cut back on any of those things then we have a social problem, not an economic solution.
Incidentally, tertiary education was the biggest quarterly contributor to “discretionary” inflation — like it’s something that anyone who aspires to a professional job can really avoid spending on.
Over the past year, the inflation rate for discretionary goods and services has been within the RBA’s 2-3 per cent target band, at 2.9 per cent, with the RBA’s Statement on Monetary Policy (SMP) noting that there are recent signs this slowing in price growth is spreading to areas such as hospitality.
It’s only a 4.2 per cent rise in the cost of life’s essentials that is keeping inflation above target, and higher interest rates are actually contributing to some of that inflation, such as by reducing new building and housing supply, pushing up rents.
But, once again, Michele Bullock admitted that, to a large extent, her hands are tied.
“If other parts of the economy are resulting in inflation which is much higher, then we do need — it’s the only tool we’ve got — we do need to think about using interest rates to impact the parts of the economy we can.”
The RBA’s biggest fear is that we’ll all get used to bigger price rises and its 2-3 per cent inflation target will either lose credibility or require much more aggressive rate rises to maintain.
In the meantime, it’s anyone’s guess as to how many households and businesses will need to be screwed down by the RBA’s interest rate hammer to get the cost of essentials under control.
Posted 5h ago5 hours agoTue 7 May 2024 at 6:54pm, updated 2h ago2 hours agoTue 7 May 2024 at 10:03pm
