Stephen Miller
One has to feel a little bit of sympathy for RBA Governor Philip Lowe.
Some straightforward and economically incontestable commentary regarding wage growth and inflation and the desirability of linking wage growth to improvements in productivity have seen him draw fire from senior Federal government ministers.
That may or may not reflect a sensitivity to the potentially adverse (or “unintended”) impact on employment, inflation and interest rates as a consequence of the Federal Government’s approach to multi-enterprise bargaining, elements of which bear a resemblance to features of wage-setting arrangements of the ‘70s and early ‘80s that arguably proved inimical to economic performance.
Ministerial commentary may have a (re)distributional objective in mind. Fair enough. But those objectives are best dealt with through the budget and tax process.
Monetary policy is not well equipped to deal with income distribution objectives.
It also comes at a time when the Reserve Bank of Australia (RBA) is among the more dovish central banks, having kept the policy rate lower than a number of similar developed economy central banks.
The policy rate in Australia will likely finish the year at 3.10 per cent, below that of the US Federal Reserve (likely 4.50 per cent), the Bank of Canada (likely 4.25 per cent), the Reserve Bank of New Zealand (already at 4.25 per cent) and even the Bank of England (likely 3.50 per cent). Only the European Central Bank (which only abandoned pandemic “emergency” settings in June will finish 2023 with a lower policy rate somewhere between 2.25 per cent and 2.5 per cent).
It is clear that the hurdle for higher policy increments in Australia is considerable and much higher than a number of other “like” central banks.
On that score, it appears that the RBA is consciously eking out a different path.
Some of this reflects a belief in Australian economic “exceptionalism”: the notion that episodically arises in RBA commentary that Australia’s wage and inflation circumstances are “different” to elsewhere in the developed country complex. The evidence for such “exceptionalism” is scant. Certainly, any “difference” was not evident in either recent wage and inflation data.
Worryingly, it was a predilection toward “Australian exceptionalism” that was responsible for the policy missteps from the RBA through 2021 and into 2022.
Some Federal government ministers take that belief in “Australian exceptionalism” to egregious levels by an implicit denial of a link between wages and employment, wages and inflation, and wages and interest rates.
The RBA has defended its comparative caution by warning against “scorching the earth” to get inflation down implying a more aggressive approach involves outsized costs in terms of activity and employment.
But drawing on the ‘70s experience, an alternative construct is that that the “scorched earth” more likely comes from central banks exhibiting some prevarication in assuming a frontline and aggressive role in containing inflation and then having to slam the brakes aggressively later in the piece.
Of course, the RBA might not be on a wrong tack. Time will tell.
But domestic price indicators continue to exhibit considerable momentum.
The upside risks to the RBA inflation forecasts issued earlier this month are clear, as are the implications for monetary policy.
That underscores the key risk with the RBA approach: that it admits the possibility of the emergence of the sort of inflation inertia that was last experienced on a global scale in the late ‘70s / early ‘80s. That risk increases when changes to wage-setting arrangements increase the economy’s inflation proclivity.
Having said all that, a more nuanced communication strategy does leave the RBA with the requisite optionality to adjust the monetary policy dials if necessary.
The chances of utilising that optionality to engender a higher policy rate are set to increase.
Economic “exceptionalism” might be about to take on a negative hue.
By Stephen Miller, investment strategist
