RBA’s ‘opaque’ approach to interest rates no consolation to those hardest hit by inflation
“Patient” is a useful word for the reserve bank governor, Philip Lowe, when it comes to the timing of any interest rate rise. It’s vague and gives few clues as to how much time is left.
After Tuesday’s RBA meeting, Lowe said the bank’s board “was prepared to be patient as it monitors how the various factors affecting inflation in Australia evolve”. He echoed the sentiment at Wednesday’s National Press Club address on the year ahead.
We know Lowe would like wage rises to be “sustainably” higher than underlying inflation but we remain in the dark about how much they need to rise – and for how long – before the RBA would lift the official cash rate from the record low 0.1% annual rate it has sat at since November 2020.
That matters for borrowers on variable interest rates but also for those experiencing price rises that are already making it hard to get by.
It’s not that clear what constitutes “wages” for Lowe. Yes, there is the wage price index that he said had risen 2.25% in 2021 compared with the bank’s forecast of 1.75%.
The half percentage point miss isn’t bad given we’ve been in the midst of a pandemic for two years. But the gap was more than twice as big for the underlying inflation result, which came in at 2.6% in 2021 compared with the 1.5% forecast by the RBA, implying real wages were in retreat last year.
The RBA expects the wage price index to increase by 2.75% in 2022 and 3% in 2023. Its “central forecast” is for underlying inflation of 2.75% this year and next, suggesting that 2021’s loss in real wages won’t be made until at least 2024, depending on whether the index can keep outpacing inflation.
But the “broader measures of labour costs” seem to be what Lowe – and to some extent the prime minister, Scott Morrison,
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