Our Reserve Bank can operate with the air of an untouchable institution. With petrol prices spiking, an Iran war reshaping global oil supply, and recession warnings increasing, is May 5 the right time for another rate rise? History suggests our RBA may not be reading the room.
Recently I attended the 60th birthday of good friend who worked as an economist for the Reserve Bank for at least four Governors. As a result, a number of those Governors were at this party. Now, I’m a tall guy with a pretty well-known face, but not one of these governors, including our recent RBA leader, made any attempt at friendliness towards me, though Michelle Bullocks’s husband was very sociable. I guess he doesn’t read what I write!
Now, before I pile into the RBA for historically dumb decisions, let me confess I have respected many of the people who ignored me at this party — though I did give it big time to Dr Phil Lowe, who made a terrible mistake telling this country’s borrowers that interest rates wouldn’t rise until 2024. Of course, he didn’t say that precisely, but it was the message the media ran with, and he never told them they were wrong. And his board never made him back away from the call that looked OK when we were in lockdown from Covid. As time went on, he should have done a mea culpa. Until that mistake, I was with Dr Phil.
RBA Governors seem to carry their office like a crown rather than a responsibility, and I don’t know why. Years ago, I had lunch with the very down the earth Bernie Fraser with a small group of economists when he was Governor. He didn’t seem to tolerate my objective observations, despite the fact I’d learned economic stiff arms from my time as a lecturer at the University of New South Wales. Economists at UNSW engaged in debate. Lunchtime papers given by colleagues to colleagues involved aggressive analysis of each person’s point of view!
I’ve received phone calls from Deputy Governors because they thought my calls against their boss were seen as unfair! Others have failed to say ‘g’day’ at functions, which has made me think that these people forget they’re our public servants, with really important jobs that affect the lives of millions of Australian borrowers.
I understand it’s a hard job, but these Governors are paid over $1 million a year. They need to get their calls right. If they don’t, they have to expect some hard analysis from the likes of me.
And don’t forget ex-Treasurer and PM Paul Keating has often complained that the “RBA is always late to the party.” Keating has said a lot more, and this take of his on the RBA is spot on:
“The problem about central banks, and this is true of the Reserve Bank of Australia — it has become a sort of deity, where lesser mortals might inquire, however respectfully, what the exalted priests might be thinking or have in mind for their prosperity or the country at large. The only difference between the deity and those to be governed is that the governor and his deputies do not wear clerical collars and black suits. But that is the only difference in their comportment and attitude.”
Ouch!
Wednesday brings the latest inflation reading. If it’s higher than expected, you can bank on the Reserve Bank raising rates on Tuesday week. They shouldn’t do that — despite most economists expecting they will — because none of those experienced number-crunching economists, like those at the RBA, know exactly how the Iran war has affected consumer spending, businesses’ intended investment, and how the petrol price spike since early March has changed the course of economic growth. You can’t rule out a recession being around the corner.
AMP’s chief economist Shane Oliver told 7 News that the Iran war could be a recession creator. Oliver warned the situation has been deteriorating since the Strait of Hormuz effectively shut down at the start of the conflict, cutting off a critical artery for global oil supply. “The longer this goes on, the longer the flow of oil out of the strait is delayed or stopped, then the risk of recession grows in Australia. If we actually start to run low on fuel, and therefore have to restrict our usage, that then has an economic impact and potentially knocks us into recession through the second half of this year.”
7 News correctly reported that the Strait of Hormuz carries a significant share of the world’s oil, with Asia relying on it for around 80% of its crude supply. Current disruptions are estimated to be cutting off between 10 and 15% of global oil supply. For now, there’s a lag effect cushioning the immediate blow. Refineries across Asia are still processing oil from shipments that departed the region earlier in the year, but that buffer is expected to run out soon. “You will start to see a cut in production in Asia. They won’t then have the fuel to put back onto ships to Australia as refined products. Then you see a flow-on to Australia,” Oliver said.
He then sees a supply squeeze expected to ripple quickly through the economy, pushing up the cost of goods well beyond petrol, as higher transport and fertiliser prices feed into everyday expenses.
The actual impact of the big spike in petrol prices is akin to a number of rate rises — and that’s why the RBA should play a wait-and-see game before delivering another rate hike.
This week we’re bound to see the US Federal Reserve hold on rates because the Iran war has created question marks for the economy there. These unknowns also apply to our economy — so I hope the current Governor and her board are wise enough to ‘hold fire’ on rate rises.
Also, why have economists gone quiet on why a rate rise — which is a cost increase — is good for lowering extra inflation created by rising petrol costs? Already this year, we’ve had two rate hikes to offset the three cuts that look like they were mistakenly given in 2025. There was one before the federal election, which the Albanese Government must have loved, another on May 20 after the election, and then a final one on August 12.
But then five months later, the RBA raised rates by 0.25% in February and March — because you have to think they misread what was happening to inflation when they cut rates. Call me an economist, but I know rate rises work with at least a six-month lag, while petrol price rises of the recent magnitude work a lot faster in killing spending.
Respected economist and former Treasury official Chris Richardson says these price increases are like three rate rises. On those criteria, the RBA should be holding fire until we see how long this war and these high petrol prices are going to go on for.
I hope I can give the RBA team a pat on the back on May 5 when they hand down their rates decision, rather than the occasional kick in the butt! But these ‘kicks’ are an important check for any organisation that engages in writing economic scripts with side effects. The words of the deeply revolutionary poet William Blake, who challenged 18th-century social and political norms, come to mind: “Without contraries is no progression”. Being ignored at parties by people in ‘somewhat’ high places won’t stop me from being controversial when the side effects of their decisions are serious – that’s my job.
Peter, I hope the RBA are subscribed to your commentary. I was in a grog shop last night to pick up a slab of my favourite brew and the place was dead, so too the pub it shares the car park with. I live in a tourist destination and I realise this is not peak season where I live, but this is my third year living here and it’s a lot quieter now than I have seen it at this time of year in the previous two years. Myself & the dog have beautiful sandy beaches pretty well to ourselves at the moment. The van parks should be filling up by this time and they’re not. Maybe some of the grey nomads that start trickling in here after Easter are staying at home this year.