Australia Leaves Room to Sneak in More Inflation
(Bloomberg Opinion) -- Nice try, inflation. You still have some work to do. While hikes in Australian interest rates are no longer so distant as to be almost theoretical, relatively easy money will be a feature of the economy for the foreseeable future. The central bank doesn’t sound willing to risk stalling the recovery by mounting an assault on climbing prices.
The relatively modest steps taken Tuesday by the Reserve Bank of Australia open the door a crack to an eventual tightening, but fall well short of the withdrawal of accommodation announced in Canada, the likely taper this week of the Federal Reserve’s quantitative easing, and prospective hikes soon by the Bank of England. In a rare briefing after the decision, Governor Philip Lowe tried to distance the RBA from what’s going on in the major economies, and almost sounded dovish. The main actors in any vast global unwind of ultra-accommodative policies are far from Sydney. The bigger message, if there is one, is that different economies will move at varying speeds. The pace will be nuanced and uneven, and the picture more complicated than a simple narrative would suggest.
The RBA has begun to only slowly reel in some stimulus that flooded the economy as Covid-19 spread across the world in early 2020. The bank said it will dispense with its target of holding the yield on the three-year government bond at 0.1%. Two other vital prongs of the central bank's coronavirus crisis response, QE and a near-zero benchmark rate, are unchanged. Lowe nodded to investors’ concerns about the recent rise in inflation by signaling he’s open to lifting rates earlier than his prior guidance of 2024. Perhaps not dramatically sooner, however: Lowe stressed that the RBA will be patient and said a “further, but only gradual, pick-up in underlying inflation is expected.’’
The yield goal, born early in the pandemic in a slew of measures to stabilize markets and put a floor under the first recession in decades, was starting to become more trouble than it was worth. With inflation rising globally and domestic prices ticking up, traders had been testing the RBA's resolve to defend its objective. The yield measure was the easiest of the bank's ultra-accommodative pillars to remove. If a bone had to be thrown to markets, this was it. Jettisoning QE and lifting the main rate, the latter of which hasn't happened since 2010, will be much harder and more consequential.
Part of the standoff between investors and the bank reflects more a buoyant economy at home. After a projected tumble in gross domestic product last quarter, businesses and consumers see better times ahead. Sydney and Melbourne are emerging from some of the world’s longest lockdowns: Bars are filling up, sip-at-home is no longer the default for lattes, kids are back in class and workers in offices. My 77-year-old mother was over the moon to get her hair cut.
The rest of the interest-rate angst needs to be seen in a global context. “Given that other market interest rates have moved in response to the increased likelihood of higher inflation and lower unemployment, the effectiveness of the yield target in holding down the general structure of interest rates in Australia has diminished,’’ Lowe said in his statement. He gave no sign he’s eager to join the Reserve Bank of New Zealand and the Bank of Korea in beginning to constrain activity. If rooting for higher rates is easy in the current environment, Lowe isn’t among the cheerleaders.
Australia is reluctant to throw in the towel. The RBA came late to QE and rock-bottom rates. It didn't go that far during the global financial crisis; local pundits scoffed at the idea. Having become a late member of the club, Australia isn’t rushing to leave, unlike New Zealand, which is boosting rates, and Canada, where officials said last week they’ll retire bond purchases. That’s because the pandemic was merely the tipping point; Australian officials had been fretting about too-low inflation at least a year before Covid and canvassed scenarios in which they’d introduce what was still quaintly seen as unconventional policy.
Back in 2017, then-Federal Reserve Chair Janet Yellen called anemic inflation a “mystery.” The RBA has its share of sleuths. The bank began saying last year that it was no longer content with forecasts of higher inflation. It wanted the real thing. And not just any old inflation; price increases had to be meaningfully — not just barely or sporadically — within the bank’s target of 2% to 3%.
Lowe advised lawmakers in August that it wasn't enough for consumer prices “just to sneak across the line,” language he repeated during a major speech the following month. An inflation rate of 2.1% or 2.2% isn't sufficient to say “job done,” the governor told the House of Representatives Standing Committee on Economics. So it's not surprising that the central bank isn't panicking about the pickup in inflation last quarter to — you guessed it — 2.1%. Great start, and worth acknowledging, but it hardly merits a revolution in policy.
Lowe has a coffee cup on his desk that says “half full.” For the first time in a while, his sense of optimism is being borne out. Just not too much — leave some room for milk and, just possibly, sugar.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
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