RBA almost has inflation dragon by the tail – but at what cost?

Ever so slowly, the Reserve Bank is catching up with the inflation dragon.

But the growing question for the RBA, and everyone who depends on the economy for a job and a wage and a roof over their head, is what sort of condition we’ll be in once it has the dragon by its tail.

While the bank’s Philip Lowe is signalling a higher cash rate ahead, the rationale for it is being eroded.Credit:Alex Ellinghausen

As expected, the bank on Tuesday lifted the official cash rate for the 10th consecutive time. At the start of May last year, the cash rate was 0.1 per cent. After today, it’s 3.6 per cent.

It’s the most aggressive tightening of monetary policy since the 1980s, which ended in recession, and some economists fear the same could happen again in the next 24 months.

The cash rate is now at its highest point since Flo Rida was top of the charts with the song Whistle in 2012. But the only whistling going on is among those with super-sized mortgages. The monthly repayment on a $604,000 mortgage, the current national average, has climbed by more than $1100 in less than a year.

In percentage terms, that’s a 54 per cent increase. Talk about high inflation.

That’s the reason almost every measure of consumer financial pressure is showing signs that the RBA is creating demonstrable problems around the country.

Consumer confidence is anchored at recession-like levels, two-in-five people as measured by National Australia Bank’s behavioural economics team reported some form of financial hardship in the final three months of 2022, while Suicide Prevention Australia research shows an increasing number of people reporting “serious thoughts of suicide” over the past year.

Tuesday’s decision was locked in last month when RBA governor Philip Lowe finished his statement accompanying February’s rate rise by saying the “board expects that further increases in interest rates will be needed over the months ahead”.

Now, with evidence that last year’s string of rate rises is starting to have an impact, the final line has been altered. According to Lowe, “the board expects that further tightening of monetary policy will be needed”.

In the world of central banking, the impact of a stray “s” – such as in the word “increases” last month – is counted in terms of higher unemployment and bigger home loan repayments.

While the bank is signalling a higher cash rate ahead, the rationale for it is being eroded.

Lowe notes that inflation in Australia has peaked. The Australian economy is slowing, with the governor expecting growth to be below trend “over the next couple of years”. The jobs market remains tight but “conditions have eased a little”.

And one of the bank’s greatest fears, of a 1970s-style surge in wages, is all but disappearing in the fog of history.

“Wages growth is still consistent with the inflation target and recent data suggest a lower risk of a cycle in which prices and wages chase one another,” he said.

This is recognition that the most recent indicators on wages growth have come in substantially lower than the bank had feared. While Lowe says the RBA “remains alert to the risk of a prices-wages spiral”, it’s clear the bank is not alarmed.

Lowe maintains that the path remains narrow for getting inflation back within its 2 and 3 per cent target band while keeping the economy on an “even keel”.

That means the point at which the bank has to stop and survey the damage left in its wake is getting closer. Possibly at dragon speed.

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