Professional Documents
Culture Documents
OPINION
Clancy Yeates
Banking reporter
June 30, 2023 — 3.45pm
But all the same, many economists still think that governor Philip Lowe will
ultimately raise interest rates by another 0.25 or 0.5 percentage points, as part
of his goal of getting inflation rate back in the central bank’s 2 per cent to 3 per
cent target band.
Why are they so convinced rates will climb even higher, despite this week’s
positive news?
One reason is the underlying data on inflation, which excludes volatile items,
and which the Reserve Bank focuses on, was still pretty high, at 6.1 per cent.
Another reason is there are still conflicting signs about how strong the
economy is, including data on Thursday showing surprisingly strong retail
trade.
Finally, a big worry around the world is that inflation is “sticky”. The
Economist last week said central banks the world over are in an “excruciating
situation”, as they weigh up further interest rate rises to counter sticky
inflation, even if it risks recession.
Economists at the Bank for International Settlements this week also argued
that the “disinflation” journey is likely to get harder from here. They said there
were concerning signs that companies had been able to raise their prices more
easily than in the world of low inflation, and there was a risk this would
continue.
Many economists still think governor Philip Lowe will raise rates by another 0.25 or 0.5
percentage points. LOUISE KENNERLEY
The bank singled out inflation in the services sector as a worry because
services inflation tends to be slower to fall than goods inflation. This is also
relevant to Australia, where services inflation is also now the key concern for
many market economists.
Citi economists, for example, this week said that once you strip out volatile
items such as spending on holidays, their measure of “core” services inflation
increased to 0.6 per cent in May. Services inflation is also important because
services are labour-intensive, meaning wages have a particularly big influence
on the prices charged.
The big fear of central bankers is the dreaded “wage-price spiral” – where
businesses pass on higher wage costs by jacking up their prices, which then
leads to even higher wage demands.
So far, you’d have to say the evidence isn’t strong. A measure by the Bureau of
Statistics of wage growth across the economy, the wage price index, rose by 3.7
per cent in the year to March. That’s hardly a dramatic increase.
The fears of a wage-price spiral also assume labour has enough bargaining
power to successfully demand big pay rises to keep up with inflation –
something that looks unlikely when unionised workers are firmly in the
minority.
The other related worry is that the public could become so accustomed to high
inflation that it becomes embedded in the expectations of both workers and
businesses. But once again, evidence suggests “inflation expectations” have
not really taken off. The Reserve Bank’s board minutes from its latest meeting
said medium-term inflation expectations in financial markets were “little
changed to date”.
All up, our inflation rate has clearly fallen a long way from a 30-year high of 7.8
per cent in the December quarter, and that’s good news. But it still remains far
too high for the Reserve Bank. As HSBC’s Paul Bloxham put it: “It’s too early to
declare victory in the inflation fight, but the end is looking nearer.”
The Reserve Bank forecasts we won’t get underlying inflation back down to 3
per cent until about the end of 2024, and its very blunt way of pursuing this
outcome is to cause economic activity to slow by raising interest rates.