Source : Perth Now news
The Reserve Bank’s recent decision to hold interest rates is not expected to last, as one of WA’s leading labour economists urges the bank board to be more assertive and take action on inflation.
The RBA voted unanimously at its August 11 meeting to hold the cash target rate at 4.35 per cent despite inflation continuing to grow above the ideal 2 to 3 per cent range.
The RBA said in a statement that financial conditions were gradually tightening in response to three increases in the cash rate target earlier this year, and it was waiting to see the results of this before increasing again.
“With monetary policy judged to be somewhat restrictive, the board decided to leave the cash rate target unchanged while it assesses how the economy is evolving. The board will continue to do what it considers necessary to bring inflation sustainable back to target, including increasing the cash rate target further if upside risks materialise,” it said.
But Bankwest Curtin economics centre professor Michael Dockery believes this action is just prolonging the inevitable.
“Inflation has now been above the 2 to 3 per cent target range for a full year and the latest figures show no sign of domestic inflationary pressures easing,” he said.
“They can’t just keep saying they won’t hesitate to act to get inflation back in the target zone – we must be close to the point where they risk losing control over inflationary expectations.
“I was thinking perhaps they might have to increase (the rates). The explanation they’ve given is that we’ve had three rate rises earlier in the year, and they’re saying they’re waiting to see them take effect to see how demand and so on reacts.”
The RBA forecast inflation to be up to 4.8 per cent in June this year, but it came in lower at closer to 4 per cent. Professor Dockery said this was below their forecasts, but only due to several external events such as President Donald Trump’s tariffs and conflict in the Middle East impacting predictions.
“That’s why those projections were really high, but the effects of the conflict haven’t been anywhere near what they thought it would be on oil prices, so that’s why (inflation) is under the forecasts,” he said.
“They’ve typically been much more assertive than that. They’ve said they won’t hesitate to act, and they’ll do what it takes to get inflation back into the target range of 2 to 3 per cent.
“With the latest inflation figures, I felt things aren’t improving. I thought perhaps they did need to react – they can’t keep saying ‘we will act’ without actually doing it at some point.”
He said despite significant improvements in tradables – the cost of things Australia buys from overseas – this is more down to luck and not something controlled by the RBA. Domestic non-tradable products have been trending up, suggesting domestic inflationary pressures are getting worse.
“Every indicator of underlying inflation got worse in the last figures, which I would have thought is a real concern. (The RBA) seem to have ignored that this time,” he said.
“One of the issues now is we’ve had inflation out of the target for a year, and they’re not projecting it to come back until the middle of 2027.
“It’s really important the Reserve Bank has credibility and can manage people’s expectations. But now we’ve basically got inflation of 4 per cent that’s baked into a whole lot of things that will happen in the coming year.”
Things such as the indexation of wages, wage agreements, indexation of welfare payments and contract changes are all conditional on inflation.
For everyday people, this likely means another rate rise which will hit mortgage holders hard, particularly those with recent purchases needing to pay much higher repayments.
In the short term, it will likely increase prices of foods at the shops.
In the long term, it could lead to a serious spike in unemployment rates.
“I have a feeling (the RBA) puts too much weight on inflation as opposed to unemployment, so the Reserve Bank is saying they’re happy for unemployment to go up if that’s what’s required to keep inflation down,” Professor Dockery said.
“That’s what really hurts families, that job loss and affects on mental health.
“The RBA believes in the long run, the best way to manage the economy is to have low and stable inflation of about 2.5 per cent, and they want to get there – if unemployment has to go up to do that, then so be it.”
He also voiced concerns over a “spectre” of a more serious crash hanging over the property prices.
“A lot’s going to demand on the housing market. If this is looking like a rapid decline, they probably won’t move because as people’s wealth declines as housing comes down, this will reduce their demand for spending and confidence in the economy. So that will sort of do the work that interest rate rise would have done anyway,” he said.
The next ordinary meeting of the RBA is scheduled for late September, and a decision on interest rates is expected to be announced on September 29.
