Australia’s Printing-Press Stimulus to Fuel Inflation, CBA Says

(Bloomberg) -- Australia’s vast government cash transfers to households are being indirectly financed by central bank bond-buying, which constitutes money creation, Commonwealth Bank of Australia says, arguing the accompanying jump in money supply will fuel faster consumer-price growth.

“The outlook for inflation should be considered in the context of the intersection of monetary and fiscal policy that has occurred over the pandemic,” CBA’s Gareth Aird said in a research note Wednesday. “An unprecedented fiscal expansion that has essentially been funded via the printing press is anticipated by us to have an impact on future inflation.” 

Aird, head of Australian economics at CBA, says the lift in money supply is more important to the inflation outlook this time because:

• It has not been accompanied by a commensurate lift in credit -- which would serve as a constraint on future consumption and inflation -- as previously had been the case
• The increase in money supply has found its way into household bank accounts via transfer payments

Aird has been one of the most hawkish forecasters in the Australian economics community and reckons the faster inflation outlook will see the Reserve Bank of Australia raise interest rates in May 2023. That’s despite Governor Philip Lowe pushing back two weeks ago against early policy normalization predictions, reiterating that he doesn’t expect a move before 2024.

Lowe argues wage growth remains well short of levels needed to return inflation to the 2.5% midpoint of the RBA’s target. Yet Aird’s focus on money supply slightly alters the parameters of the debate.

Aird estimates accumulated savings during the pandemic will have risen by A$230 billion ($166 billion) at the end of this year. He says if households tap 15% of those savings domestically in 2022, it will see a direct boost in consumer spending equivalent to 1.75% of gross domestic product. 

“The risk lies with a larger number,” Aird said, forecasting this will underpin higher consumer prices. CBA sees underlying inflation reaching 2.5% in mid-2023, a time when the central bank expects it will still be 2%.

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