EDITORIAL: RBA should hold its nerve over interest rates
Throwing Government money around in what Chalmers will no doubt badge as cost-of-living relief in the May 12 Budget will be pulling in the opposite direction to the RBA’s use of its interest rate lever.
For weeks now we have been exposed to the dire impact of the oil price shock brought on by the war in the Middle East.
These results have been both real and predicted.
The real pain has been obvious. Motorists were hit hard by bowser prices and the transport and farm sectors were hammered by the rise in diesel costs.
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Economists have been convinced that the Reserve Bank of Australia is set to raise interest rates by another 25 basis points to 4.35 per cent at its meeting on May 5 — which would be its third consecutive interest rate rise.
The warnings suggested that the RBA would use the inflation data released on Wednesday to lock in that rise.
On the surface the numbers played into that narrative.
News sites were humming as soon as the Australian Bureau of Statistics data was released.
The top line was that inflation roared to a three-year high of 4.6 per cent after the first full month of the Iran war saw average petrol prices surge.
This marked a huge jump from February’s annual headline inflation pace of 3.7 per cent before the US and Israeli air strikes on Tehran.
“We already had an inflation challenge in our economy, we know that, before the conflict, but the tick up in the monthly headline data today was driven by the conflict and this war could drive inflation up even higher before it comes back down again, ” Treasurer Jim Chalmers said on Wednesday.
And the takeaway for many was an interest rate rise was more likely next week.
And yet without volatile items, underlying inflation grew by 3.3 per cent over the year. This was unchanged from the February figure.
This was still above the RBA’s target band of 2-3 per cent.
But it was surely an encouraging sign for inflation outside of the oil shock.
Households have already been hit with the double whammy of interest rate rises and a huge spike in petrol costs.
As such we don’t believe there is a need to whack households again.
The RBA should hold its nerve and keep its finger off the rates rise trigger.
Furthermore, we urge the Federal Government to put away its reflex urge to spend.
It is commonly held that Government spending before the war has been a key driver of inflation — and by extension, rising interest rates.
The RBA itself has outlined that link.
And the International Monetary Fund has warned against responding to higher oil prices with untargeted cost-of-living relief measures
It is clear the impact on family budgets from the flow-through of higher oil prices has a way to go.
But throwing Government money around in what Dr Chalmers will no doubt badge as cost-of-living relief in the May 12 Budget will be pulling in the opposite direction to the RBA’s use of its interest rate lever.
And if that is the case then politics will have won the day over sound economic management once again.
