The AFR View
RBA must show independence on material inflation risk
The Treasurer’s pre-emptive insistence makes it even more important that the new governor and her board actively demonstrate the central bank’s political independence.
The stronger-than-expected acceleration in quarterly inflation from 0.8 per cent to 1.2 per cent means a further interest rate rise must be on the table at the next meeting of the Reserve Bank board on Melbourne Cup Day.
In recent days, new Reserve Bank governor Michele Bullock has rightly declared a low tolerance for allowing inflation to run above the narrow path for it to return to the official target band of 2 per cent to 3 per cent by 2025. She has insisted that the board “will not hesitate to raise the cash rate further if there is a material upwards revision to the outlook for inflation”.
RBA governor Michele Bullock. Louie Douvis
Treasurer Jim Chalmers insists that Wednesday’s 5.4 per cent annual inflation read remains in line with Treasury’s budget forecasts and does not represent any “material change” to the inflation outlook.
The Reserve Bank will redo its forecasts in the wake of the higher-than-forecast September-quarter CPI. But, if anything, the treasurer’s pre-emptive insistence makes it even more important that the new governor and her board actively demonstrate the central bank’s political independence. That’s what the financial markets are saying by pricing in an increase to the Reserve Bank’s 4.1 per cent cash rate by Christmas.
The 1.2 per cent September-quarter increase in the Reserve Bank’s preferred measure of trimmed mean inflation, which strips out volatile price movements such as the rocketing cost of fuel, was higher, and surely materially higher, than its implied forecast of 0.9 per cent. With the Middle East crisis increasing the risk of supply-side shocks in global oil markets and offering little prospect of relief from the $2-plus per litre petrol prices, rising inflationary expectations are at risk of becoming embedded.
Dr Chalmers is right to say “the world is inflicting price pressures on Australians”. But not all the blame can be sheeted home to global volatility rather than domestic factors. Services inflation in labour-intensive sectors is proving stubbornly high as businesses pass on to customers as higher prices the wages bill pushed up by the Fair Work Commission’s double-digit increase in the economy’s wages floor over the past two years.
The treasurer on Wednesday dismissed any linking of inflation to wage growth as a “retro view”. Yet Ms Bullock rejects the claim by some commentators that the tight labour market amid the near 50-year low 3.6 jobless rate no longer pushes up inflation. While it is legitimate to refer to related measures of labour market slack, the current jobless rate is surely below the economy’s non-accelerating inflationary rate of unemployment, or NAIRU. This is more than just a “technical assumption”, as Dr Chalmers has labelled it.
Dual mandate
Given the hot CPI reading, sticky services inflation, a cash rate below that of other comparable central banks, and a soft exchange rate, failing to respond to the apparently material upside risks would be difficult to reconcile with Ms Bullock’s stamping of her inflation-fighting credentials in her first major speech on Tuesday. That came after her comments following her first board meeting as governor on October 3 fell short of sending a clear signal about being alert to the new inflation dangers, including a 30 per cent jump in world oil prices over the previous three months.
The baton change from Philip Lowe to Ms Bullock, during the sharpest outbreak of inflation in a generation, came amid the proposal from Labor’s Reserve Bank review for the central bank to pursue a “dual mandate” for maintaining price stability and full employment. At least one former governor, Ian Macfarlane, says this would risk muddying the focus on targeting inflation.
Ms Bullock says the Reserve Bank always has had a full-employment mandate alongside low and stable inflation, and that in practice these objectives have “more complementarities than is often recognised”. For instance, low inflation can provide the foundation for sustainable job growth. Yet, as Ms Bullock also notes, that is only true when inflation is anchored in the target band, not when bringing the biggest inflation outbreak in a generation back to target. In an economy operating at full capacity, calls for monetary tightening will regrettably, but inevitably, require unemployment to rise.
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