Stephen Miller
I’ve had a hard time convincing myself that the Reserve Bank of Australia (RBA) will raise the policy rate when it meets on February 10th.
Markets appeared to share that judgement. At the time of writing markets rated the probability of an upward adjustment to the policy rate at only around 30 per cent.
I had thought that with a greater than usual amount of uncertainty clouding the global economic landscape that the discretion of no change would prevail over the valour of a policy rate increase.
However, I’m now wondering if indeed that discretion may dictate a hike at the February meeting and the more valorous (if less advisable) path may be to leave the policy rate unchanged. That is, I am increasingly convinced that inflation is a clear and present danger, one that is only exacerbated by government inaction – probably much to the chagrin of the RBA.
Much was made of what looked to be a better November inflation read. But while that November inflation read may have been better than feared it is still difficult to see December quarterly trimmed-mean inflation number that is low enough (say below 0.8 per cent in quarterly terms or 3.2 per cent in annual terms) to at the very least provoke a meaningful discussion around the requirement for a policy rate increase.
RBA Deputy Governor Hauser warned last week that the RBA doesn’t draw a line in the sand on inflation to the extent that there is an outcome for the trimmed-mean (say above 0.8 per cent) that mandates a tightening.
That said the arithmetic is if not compelling then certainly persuasive.
Even an extremely modest increase in the December month trimmed-mean CPI of a little above 0.2 per cent implies a quarterly outcome somewhere between 0.8 and 0.9 per cent which is enough to drive the annual rate to 3.3 per cent. To repeat – that is with a very modest December monthly increase.
The current RBA forecast is 3.2 per cent.
With a strong rebound evident in consumer spending and the labour market looking to be in relatively good shape, this leaves the balance of probabilities favouring a policy rate rise. Indeed, by not doing so the RBA may leave itself facing the prospect of confronting an even more aggressive approach down the track.
At the risk of sounding like a broken record, I have in the past made the observation that Federal and State Governments have long averted their eyes to meaningful structural reform that may assist productivity growth and ameliorate inflation pressures. Indeed successive Federal and State governments have reversed some of the progress made during the Hawke-Keating and Howard eras.
Of particular note are regulatory forays into wage-setting arrangements and the industrial relations arena which have proven inimical to productivity growth.
That has seen unit labour cost growth run at around 5 per cent, something manifestly irreconcilable with the RBA’s current 2 to 3 per cent inflation target.
Fiscal policy too (at State and Federal level) has done little to attack the fundamentals of inflation pressure. Indeed it has tended to exacerbate inflation pressures.
That leaves me thinking that the RBA should raise the policy rate when it meets on February 10th.
I suspect it will.
The Fed: has the President put a bullet in his foot?
I had thought that the Federal Reserve (Fed) would stand pat on a policy rate adjustment at the meeting concluding on January 28th.
The markets currently assess the probability of a policy rate reduction from the Fed at around 20 per cent.
Certainly, the fallout from President Trump’s tariff measures have not been as damaging to activity as was perhaps commonly perceived back in April and while inflation has exhibited some “stickiness”, it hasn’t accelerated to an extent that inflation expectations became unanchored (maybe because the Fed showed a reluctance to aggressively lower the policy rate).
Indeed, the most recent January CPI and PPI have largely been better than feared.
In that context and given some signs of cooling in the labour market, it might be argued that the Fed could certainly justify a cut in the policy rate at its end-January meeting.
In that sense President Trump’s capricious and vindictive assault on Fed Chair Powell and the Administration’s vexatious employment of state judicial power to pursue the Fed Chair could conceivably constitute a self-administered shot in the foot.
Of course, the Presidents assault shouldn’t influence the Fed either way, but in what might be a lineball decision, it may psychologically push a number of the Fed’s rate-setting decisionmakers to eschew a rate cut at the coming meeting.
Certainly, such an eschewal is perfectly reasonable: economic growth is robust and inflation – though better than feared – is still some way north of the Fed’s 2 per cent target. In that context even if a rate cut is “justifiable” there is no compelling argument to enact one. Indeed it may be better to keep some monetary policy powder dry!
It will be an interesting meeting…not to mention aftermath!