There are five reasons why the RBA should not tighten monetary policy at all tomorrow.
First, commodity prices are going to crash over the next year. This is already baked in.
Current trends in China indicate a renewed structural reform push that includes $1.5tr less new credit this year than last, much of it in commosity-centric growth areas.
As well, the global inventory supercycle is peaking and US inflation is going to fall away fast as it does. This will be exacerbated by the recent Fed policy error triggering a strong US dollar, ending the financial bid into commodities.
The last time we saw these conditions was 2014/15 and commodity prices cratered.
Second, there has been no change in the Australian political consensus of a return to the mass immigration-led growth model despite it comprehensively losing the argument for its benefits.
As soon as Australia meets herd immunity targets and passes the federal election, which looks likely to happen around the same time in Q2 2022, the first thing that Canberra will do is reopen the immigration spigot.
Given China will not allow the return of its tourists and students, the next wave of would-be migrants will be all be work-hungry cheap labourers from the Indian sub-continent that will crush wages growth.
Third, macroprudential tightening is coming. Investors are charging back into the property market and they will have to be choked off.
APRA is corrupt and beholden to the political cycle. But the RBA is really in control via the Council of Financial Regulators and can bully it through.
This will trigger mortgage rate hikes, something Australians have never been more sensitive to. It will slow consumption plus add to a downside shock in dwelling construction currently pumped up by fiscal.
Fourth, Australia is at war with its largest trading partner. This has been papered over by a lucky iron ore price spike but as that reverses violently the underlying damage will be exposed. This is an ongoing structural adjustment that will take the whole cycle to play out.
Finally, we have no inflation and wages are weak. There is precisely zero reason to be spooked by wage rises. They are what we need to help deleverage households and to support higher domestic demand as the external falls away.
Soon enough, the first four points will slow and choke off wage gains anyway.
The RBA has done a terrific job in the past year of persuading markets that it is has changed its hawkish to dovish spots. This is slamming the Australian dollar lower than the counter-factual amid a tearaway (but very temporary) spike in Australia’s terms of trade.
It should not give up those gains now just as the global COVID recovery peaks and falls away.
Any tightening now (other than MP for the property market) comes with the highly likely outcome of becoming pro-cyclical very quickly.
