NAB chief executive Andrew Irvine says a recession can’t be ruled out. With petrol prices surging, consumer confidence collapsing, and two rate rises already delivered this year, the RBA faces one of its most consequential decisions in years, and former RBA official John Simon says it may ultimately come down to the personalities around the board table.
After covering Reserve Bank decisions for three decades and with an interest rate rise effectively banked by most well-known economists, a former RBA official gave me a new and sensible take on what will be decided today. Ultimately, it will be the board members who’ll decide, so I have to headline that the NAB boss is warning that none of us should rule out the possibility of a recession.
And be clear on this, if a recession shows up driven by what NAB’s Andrew Irvine says are high petrol prices hitting transport, agricultural and logistics businesses, as well as rising interest rates, then the RBA board and Treasurer Jim Chalmers have to be fingered as the prime suspects in perpetrating this economic crime.
Sure, Donald Trump’s fingerprints are also seen at the scene of the crime, but we had big inflation concerns before US bombs started flying in Iran on February 28, this year.
It’s with all this considered that I thank the AFR’s Lea Jurkovic for interviewing former RBA official, John Simon, who agrees with me that there are cases for both a rise and a pause on rate hikes.
Simon argues sensibly that whatever is announced at 2.30 pm today, it will come down to “the personalities of the people around the board table.”
Historically, there has been a belief that the Governor and the Treasury Secretary often have had the most sway on decisions and given their positions and their support teams of economists, they should have a big influence on what the board decides. That said, there has been a trend created by successive Treasurers to add people of the real world to the old ‘blokes’ who used to plonk on the seats around the board table of the RBA.
That makes sense as public servants in positions of great power in Treasury and the RBA are torn between the objective honesty of their economic training and the political masters who’ve given them a job!
Business leaders, union stalwarts, social welfare experts and economists of the real world all help to give feedback on what’s happening out there in Australia.
Now, I know Michele Bullock, who I admire from afar and who hasn’t had the top job long enough for me to praise or bag her efforts, has to be caught in this dilemma of economics versus politics. How do I know this?
Well, it’s because Bullock, like her predecessors before her have never had the guts to say what I’d love her to say today: “We have kept interest rates on hold because we’re worried about the war in Iran creating a recession, however, if next week’s Budget doesn’t do enough to help us fight inflation, we will raise rates at our next meeting.”
That’s what this country is crying out for: leaders who are balanced but not afraid to be forthright on subjects of national importance.
On my SWITZER TV program last night, I interviewed the chief economist of HSBC here in Australia, Paul Bloxham, who debated with me whether the RBA should raise rates today and his strongest argument was that inflation was high before the war sent petrol prices and inflation sky high.
On top of that, he pointed out that our economy has been near full capacity, so new injections of demand easily lead to inflation. These are strong points supporting rate rises but I countered with:
- Business and consumer confidence has plummeted recently to levels not seen since the Covid lockdowns.
- We have had two interest rate rises in February and March and rate rises take at least six months to really work to hose down fired up over-spending consumers and businesses.
- The petrol price spike since early March is akin to one or two rate rises on household budgets.
- So, we and the RBA board don’t know just how negatively affected we all are to rate hikes and petrol price spikes.
That’s why NAB’s CEO’s warning about recession should be heeded by the people around the RBA’s board table and they shouldn’t be afraid to tell Governor Bullock that many young Australians with mortgages are really worried, right now.
After borrowing too much to buy homes that were too expensive because successive governments have let us down in not making it easier for builders and developers to build, they now carry big debts that would’ve been smaller if they weren’t losing 12% of their wage to super.
Here’s a thought: why don’t governments make super fund channel cheaper funds into local housing projects rather than start-up tech companies in the USA?
But that’s a battle for another day.
As for today’s meeting, I hope they make the right decision to pause with a warning that there is an inclination to raise again, so silly spenders out there contain their stimulation of inflation. Of course, I could be wrong, and another rate rise is needed but let me argue that I know what economists don’t know, my economics training and history of writing what they’ve told me, has taught me that.
If they raise rates again, they’re gambling they’re right. And if they’re proved to have gone too far, then the young mortgagees of this country are right to think the letters RBA stand for the Real Bullies of Australia.
Many normal people think the central bank cut rates so we’d buy homes to help the economy and then they punished those borrowers with higher rates when the low rates caused inflation!
This is why I’d love Governor Bullock to put the Treasurer and the Albanese Government on notice that if they don’t give us a budget to beat down inflation, then “we’ll keep raising rates”.
It will never happen, but it should…one day .
