A WHO’S who of central banks meet this week and all will stress their commitment to price stability in the face of a huge oil-supply disruption.
The Reserve Bank of Australia’s (RBA) decision to hike shows that monetary authorities are combating a bigger foe than Iran – the pickup in inflation that fighting in the Middle East is likely to generate. But not all will follow suit.
Policymakers in Sydney are on a war footing, economically. That’s the message from Tuesday’s quarter-point hike in the RBA’s benchmark rate. While the step was anticipated by most economists, the outcome wasn’t guaranteed: The panel vote was five-to-four.
It would have been tempting, given the upheaval that followed the United States and Israeli assault on Iran – and Tehran’s retaliation – to put off the hard decision amid an uncertain outlook.
That would have flubbed the test. Inflation is much more of a problem for the RBA than for the Federal Reserve (Fed) and the European Central Bank (ECB), among Group of 10 monetary institutions meeting in the next few days.
They can afford to wait a little longer. With the local economy reaccelerating, the RBA concluded it didn’t have that luxury. Having banged the table on the risks that renewed price increases pose to long-term economic stability, the global monetary establishment may have to make hard calls in coming months.
The RBA’s position may have been acute, but its peers may face the same tough trade-offs: Crack down hard, with the danger that growth will be quashed, or try to tackle inflation more gently and potentially jeopardise price-busting credibility.
Many banks have a bit of breathing room, not an infinite supply.
Like many monetary authorities, the RBA was blindsided by the way inflation took off after the reopening from Covid. Could the current acceleration be temporary? The majority of policymakers weren’t prepared to take the chance.
Most central bankers would love to be able to look through short-term swings in volatile products like food or energy. Assuming they are short term, of course.
Some are clearly anxious, and may well applaud what transpired in Australia.
“Businesses still remember the inflation years and will likely pass through higher costs much more quickly to consumers than in 2022,” Peter Kazimir, a member of the ECB’s Governing Council, told Bloomberg News last week.
“And people will ask for higher wages more quickly than in the past.”
While central banks also face a demand shock from the Mid-East tumult, that’s a secondary concern for the RBA. In fact, governor Michele Bullock might even welcome it. The jobless rate is low at 4.1% and job advertisements show plenty of demand for labour.
Gross domestic product increased at an annual rate of 2.6% in the fourth quarter, the most in three years and well above the bank’s estimate of the economy’s sustainable pace. Embracing a slowdown doesn’t make for great optics; however, that is what officials desire.
The new tightening cycle needs to be short and, if necessary, sharp. “We don’t want to have a recession, but if it’s tough to get inflation down, we are going to have to deal with that,” Bullock told reporters after the decision.
Her counterparts would no doubt share that conviction – even if they don’t feel the pressure to follow her right away. (Australia targets the midpoint of a 2%-3% inflation band. It quickened to 3.4% last quarter.)
In this marquee week for central banks, which also includes the Bank of Japan, expect them to expound on the importance of vigilance, while not allowing themselves to get boxed in.
They are at different points than the RBA. The ECB has likely seen its last cut; it’s a question of whether and by how much the tightening is moved forward.
For the Fed, the debate is about how long its next reduction is delayed.
President Donald Trump’s pick for Fed chair, Kevin Warsh, will be under pressure to deliver the reductions the White House wants after Jerome Powell’s term ends in May, but he will need to corral the rest of the committee and some have expressed concerns about inflation.
It would be a shame amid this Oscar week for central banking if the RBA gets relegated to a footnote. The bank took a courageous stand.
In a podcast that presaged the decision, deputy governor Andrew Hauser quipped that committee members would earn their “meagre” salaries this week. Public service isn’t about big pay days, but a job well done. Just. — Bloomberg
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. The views expressed here are the writer’s own.
