While its economic forecasts were clearly based on rosy assumptions about the oil price, the absence of future fuel shortages in Australia, and the end of conflict in the Middle East, such a message coupled with the rate decision was designed to keep inflation expectations anchored. But there is just as much uncertainty about keeping inflation expectations anchored, as there is keeping a tanker sitting in the Strait of Hormuz. Each day there is a different story about the conflict which translates to a different interpretation of the oil price and how bad inflation gets in Australia.
Asked whether the monetary policy board’s decision to lift rates for the third time to 4.35 per cent was hurting households, Bullock didn’t mince her words.
“Inflation is actually hurting everyone,” she replied.
Asked if the bank had been too optimistic about oil price scenarios, she tried to allay concerns. “I don’t think we’re being optimistic,” Bullock said. “We are taking the assumption of the futures price curve. Even if oil prices stay up there, inflation will still ease a bit, because at least oil prices won’t be increasing.”
The bank’s forecast for higher-than-expected inflation of 4.8 per cent also seems rosy compared with Treasury’s forecast of more than 5 per cent. The forecast hit to unemployment over the next year was also negligible.
Two things though might have spooked consumers and businesses: the immediate impact of rate rises on inflation and a mention of the ‘r’ word.
Bullock admitted that the RBA’s interest rate hike wouldn’t do much to stop inflation over the next six months. “It’s hard, the shock with oil prices, there’s nothing we can do about that,” she said. “The first thing is that these interest rate rises are not going to do anything for inflation in the next six months. That’s done and dusted.”
She also admitted that, if businesses did not get to pass the higher prices on, we could be looking at insolvencies and a recession. “I think you’d be wrong to expect that businesses would not look to pass on some of the costs of doing business,” she said. “It’s not unreasonable for them to want to recover their costs, because the alternative is they might end up going bust. Then you will end up in a recession.”
Tuesday’s rate decision was tough news for Australians.
The RBA, to its credit, had the integrity to deliver it.
Matthew CranstonEconomics Correspondent