There’s no doubt that the Reserve Bank governor’s appearance before Senate estimates on Wednesday was good theatre.
Dubbed by one media outlet as Australia’s “most-loathed banker”, Philip Lowe parried questions from mostly hostile senators demanding to know why the central bank had inflicted a record nine interest rate rises in a row, with more to come.
The affable governor was empathetic but not apologetic, saying his role was to prevent a return of the inflation “nasties” of the 1990s, as unpopular as that might be.
Lost in the Sturm und Drang, though, was much insight into what Lowe was seeing that made him and his eight fellow board members so confident last week that “further increases in interest rates will be needed over the months ahead”. After all, isn’t inflation on the descent after peaking around the end of 2022 as global growth slows and those demand-eviscerating rates do their job?
The House of Representatives’ economics committee will grant Lowe an encore performance come Friday. The RBA’s quarterly statement on monetary policy released on 10 February offers inquisitors new material to work with.
In that report, the RBA said supply shocks such as Covid-related disruptions and the scramble by democracies to avoid Russian energy after its invasion of Ukraine “accounted for at least half of the increase in inflation”.
Since we are getting beyond Covid – notably in China, wrenchingly – and most rich economies have de-Russified their energy sources, why shouldn’t we expect the downward slide of inflation at home and abroad to be a steep one?
And if so, why the necessity of a 10th, 11th or 12th consecutive rate rise when the RBA meets in March, April and May, as implied in comments accompanying the 7 February increase?
A critical shift, it seems, is that “services prices continue to rise quickly and are now the main driver of overall inflation in advanced economies”, the RBA said, with Australia very much in that camp.
Inflation imported in the form of higher goods prices, in other words, has ignited homegrown sources of inflation that the central bank keenly wants to snuff out.
A spike of 20% or more in the cost of airline travel at the end of 2022, as some of that pent-up “revenge travel” played out, is just one of the areas of concern for the RBA.
The drum-tight labour market isn’t helping keep a lid on pricing pressures, either. On Thursday we’ll get January data from the Australian Bureau of Statistics with banks such as CBA forecasting the jobless rate will remain at December’s level of 3.5%, close to a half-century low, with the economy continuing to add tens of thousands of jobs.
Despite the pain being felt by those repaying debt as interest rates climb to their highest in more than a decade, the RBA is forecasting the jobless rate in June will still be hovering at about 3.5% and only edge higher to about 3.75% by the end of 2023.
Come mid-2025, it will still be around 4.5%. That outcome will be painful for the 150,000-odd jobs lost between now and then but that jobless rate would be one that treasurers over the past few decades would happily have settled for.
“Wages growth appears to be slowing, but it is still around its fastest pace in at least a decade,” the RBA said in its quarterly statement. Officials are keen that pace doesn’t quicken much more.
The government, meanwhile, had other reasons to be relieved about estimates. One was the ringing endorsement from the Treasury secretary, Steven Kennedy, for its intervention in December to cap domestic black coal and gas prices in a bid to drive down power bills.
Kennedy, who is on the RBA board with Lowe, told senators the “direct effects” of the price caps would be to lop half a percentage point off inflation. Consumer energy subsidies, if well-designed, could erase half as much again.
“So in total, inflation could be down by as much as three-quarters of a point across the next year as a result of the whole package we’re talking about,” Kennedy said.
That confidence jars a bit with the RBA’s quarterly review that says “energy prices are expected to add significantly to inflationary pressures over coming years”.
“Recent announcements from major energy retailers suggest that gas price increases in early 2023 will be larger than expected a few months ago,” it says.
MPs might want to ask Lowe what he makes of Treasury’s upbeat energy price projections and the ongoing risks of supply disruptions when he returns for another parliamentary grilling on Friday.
More light and less heat would be appreciated.
