The RBA will have no reason to tighten up the purse strings.
What’s the RBA going to do at its meeting today?
I can tell you one thing. They’re sure as hell not going to raise interest rates.
They not going to stop the printing presses either. If anything, they might even ramp up the pace. Last month they let us know that they were planning to slow down the pace from $5bn a week to $4bn a week. (Like you’d even notice.)
There’s every chance that with recent lockdowns that might reverse that decision.
Money just keeps on coming.
And the RBA has absolutely nothing to worry about.
Remember that their mandate is to get inflation up. They want to see it somewhere in their 2-3% target band.
And where is it now?
But no, they won’t be worried. It is true that inflation spiked last week to a 13-year high of 3.8%.
The last time that happened, then-treasurer Wayne Swan said that the inflation “genie” was out of the bottle, and the Reserve Bank of Australia jacked up the cash rate to 7.25 per cent.
Omg. 7.25%. Can you imagine.
But that’s not happening this time.
Because most of the heat in the recent numbers comes from temporary factors – from base effects.
Remember, inflation measures the change in prices levels compared to a year ago.
And a year ago, childcare became free.
And a year ago, petrol prices collapsed as demand cratered and oil prices went negative for a brief spell.
And then there was the homebuilder grant, that reduced construction costs, and then wound up.
So with all of these things returning to ‘normal’, prices spiked.
The RBA will be looking through this. Indeed underlying inflation (technically known as the trimmed mean) that strips out unusual “one-off” price changes, was a more muted 0.5 per cent for the quarter, and 1.6 per cent for the year.
1.6%. Pfft. Whatever.
You can see here on the chart there’s nothing for the RBA to be worried about.
If anything, 1.6% is an excuse to print more money, not less.
And of course, this was all before the delta outbreak and the recent lockdowns. THE RBA will be watching this very nervously.
We know that we’re primed for a negative GDP print in the September quarter. We know that the strong run in the unemployment data, and the unemployment rate is going to spike (hopefully temporarily).
So if anything, right now the RBA is primed to pivot to looser monetary conditions, not tighter ones.
But while inflation isn’t showing up in the consumer price index (CPI), we know it’s showing up in asset prices.
It’s always the way.
And there’s a lot of people calling for house prices to be included in the CPI. It kind of makes sense. I can see the argument.
But if you do that, inflation is considerably higher. Equity Mates reckon it jumps up to something like 5.7% – the highest level in 20 years!
Recent house price growth has been truly phenomenal.
But for now, that’s just a sideshow for the RBA. House prices aren’t on their agenda, as much as people might make a fuss about them.
No, for as far as my ageing eyes can see, EZ money has the run of things.