Australia Leaves Room for Inflation to Sneak Higher
(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. Some modest steps notwithstanding, the central bank doesn’t sound willing to risk stalling the recovery by mounting an assault on climbing prices.
The Reserve Bank of Australia has begun to slowly reel in some stimulus that flooded the economy as Covid-19 spread across the world in early 2020. The RBA said Tuesday 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, quantitative easing and a near-zero benchmark rate, are unchanged. Governor Philip Lowe nodded to investors’ concerns about the recent rise in inflation by signaling he’s open to lifting borrowing costs 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. “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.
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. The Federal Reserve is likely to begin tapering quantitative easing Wednesday and the Bank of England sounds poised to hike as soon as this week. The European Central Bank is straining to convince markets it means to keep borrowing costs microscopic. Rooting for higher rates is easy in the current environment.
Australia is reluctant to completely 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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