Reserve Bank’s dovish interest rate rise gives Jim Chalmers more cause to grin than grimace

The treasurer was used to empathising with borrowers after the RBA’s ‘supersized’ rises – instead, he got to talk about the budget

Jim Chalmers likes to smile a lot and Tuesday’s surprisingly moderate interest rate move gave the treasurer extra cause to grin rather than grimace.

The novelty of only a 25 basis point rise by the Reserve Bank on Monday – when most investors had been betting on twice that – lifted the cash rate to 2.6%.

Chalmers has become used to fronting up the first Tuesday of each month to empathise with borrowers facing half-percentage point hikes after four such “supersized” rises a row. Instead, he got to talk about his 25 October budget – and with good reason.

“As we do finalise the budget, we will put a premium on what is responsible, what is affordable, what is sustainable and what is sufficiently targeted to deal with the economic cards that we have been dealt,” he told Canberra-based reporters, who were more interested about his plans for stage three tax cuts.

Not stated but implied by both Chalmers and the RBA is that the government and the central bank have been working in sync. That’s in contrast with the United Kingdom, where Liz Truss had pointedly been at cross purposes with the Bank of England until she changed tack on tax cuts for the wealthy, roiling markets in the process.

The UK, said Chalmers, was “a cautionary tale when it comes to dealing with the substantial turbulence brought about by high and rising prices”. He is heeding the warning.

In ignoring pleas to extend the $3bn fuel excise “holiday” last month, Chalmers effectively levied a “universal tax” on most motorists, sapping some demand in the economy, said KPMG’s chief economist, Brendan Rynne.

“They kept their word,” Rynne said. “It shows the government understands the bigger picture.”

The RBA governor, Philip Lowe, also did his bit. He’d copped severe hindsight criticism for waiting too long to start the rate-rising cycle in May, instead repeating, mantra-like, his determination to be patient until wage rises picked up.

Rynne pointed out that Australia has not seen “runaway wages growth”, at least not yet. The September wage price index will likely be about 3% to 3.5%, or about half the headline inflation rate. That is not far outside the RBA’s inflation target of 2% to 3%, he said.

The US, by contrast, has wages rising at 5% to 6%, or well outside the 2% inflation rate set as a target by the US Federal Reserve. In response, the Fed has been slamming the monetary brakes where as the RBA is able to just “feather” them, Rynne said.

Another reason the RBA didn’t have cause to lift the cash rate higher was the relative lull of important data. The Australian Bureau of Statistics has started releasing monthly consumer price index data, but the more complete September CPI numbers won’t land until the day after Chalmers presents his first budget.

The wage price index for the quarter, too, is scheduled for 16 November – well after the next RBA board meeting on the first of that month.

An ABS spokesperson told Guardian Australia last month there were no plans to release that data monthly, “due to the costs and burden for businesses involved”.

By then, Lowe would have time to examine the budget and whether Chalmers has been true to his word about “responsibility”.

“I suspect [the budget] will be contractionary,” said NAB’s chief economist, Alan Oster. “So it also gives RBA time to think and reassess.”

As the RBA noted, there are a few uncertainties to watch, not least the global economic outlook as many central banks lift rates. Another is how household spending responds to the 250 basis points of rate increases the RBA has now unleashed with Tuesday’s hike.

Gareth Aird, the chief economist at CBA, bucked the consensus and correctly picked the surprisingly dovish RBA move. He reckons the cash rate is now economically “restrictive” above a neutral rate of about 2.5%.

“The RBA retains a hiking bias,” Aird said. “We expect a further 25bp rate rise at the November board meeting.”

That would take it to 2.85%.

After the RBA's surprisingly small cash rate rise on Tuesday, investors have pared back their expectations about future increases. Rather than a peak in the rate above 4%, the 'terminal' level is closer to 3.5% by the middle of 2023.

— Peter Hannam (@p_hannam) October 4, 2022

From then, the central bank should have time enough to gauge the lagged impact of those higher borrowing costs, and may not need to go higher, he said.

Lowe, too, will know if Chalmers has delivered on his side of the bargain.


Peter Hannam Economics correspondent

The GuardianTramp

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