RBA delivers energy war-profiteering recession

Don’t say I didn’t warn you. The RBA statement:

Inflation in Australia has increased significantly. While inflation is lower than in most other advanced economies, it is higher than earlier expected. Global factors, including COVID-related disruptions to supply chains and the war in Ukraine, account for much of this increase in inflation. But domestic factors are playing a role too, with capacity constraints in some sectors and the tight labour market contributing to the upward pressure on prices. The floods earlier this year have also affected some prices.

Inflation is expected to increase further, but then decline back towards the 2–3 per cent range next year. Higher prices for electricity and gas and recent increases in petrol prices mean that, in the near term, inflation is likely to be higher than was expected a month ago. As the global supply-side problems are resolved and commodity prices stabilise, even if at a high level, inflation is expected to moderate. Today’s increase in interest rates will assist with the return of inflation to target over time.

And there you have it. The RBA is going to “make room” for energy war-profiteering.

In all of the years I have written about energy and the RBA, this is the stupidest and most suicidal set of policy errors of all.

Wage pressures are mild, nascent, hesitant, and easily crushed. On that score alone the RBA mistake is massive, flying in the face of everything it said it had learned after the last cycle’s deflationary debacle.

And now we have the war-profiteering energy shock on top of it. Something that can ONLY be addressed by regulation, not the RBA.

Even worse, loose fiscal and tight monetary policy is the best combination to lift the exchange rate. So everything other than war-profiteering energy firms will be hollowed out further.

Indeed, the Australian economy is about to undergo a radical adjustment for no reason whatsoever.

The core of it will be house prices, which are about to crash. They will take down the entire services economy with them, followed by the banking system. And for what?

To enable a dozen war-profiteering firms to make obscene blood profits, with no follow-through investment and no tax paid while they gut households, businesses and Australian decarbonisation.

Utter madness.

Houses and Holes
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Comments

  1. SuperfluousMEMBER

    The core of it will be house prices, which are about to crash.
    This alone, if indeed it comes to pass, will be worth the short term pain.
    Sometimes one makes the wrong decisions to arrive at the right outcome…

    • Ian ArunMEMBER

      just like Covid delivered even for a short term best policy on immigration

  2. Ronin8317MEMBER

    The rise in interest rate have got nothing to do with wages, and everything to do with what banks are paying for funding. Even without a rise in the cash rate, CBA was already offering 2.25% for 18 months for term deposits. Unless the RBA wants to continue funding the Big 4 directly and indefinitely (which they did for the past 2 years), the cash rate needs to reflect reality. When ScoMo’s reckless cut to excise duty is lifted, pump prices will hit $2.50, and we’ll have an inflation around 7% for that quarter. The RBA will hike more, and Australia will have both a recession and inflation.

    The Albo government won’t do anything about energy prices. Action requires courage, and Bowen and King have survived for so long only because they’re cowards. Only a global economic depression will fix the oil price, and $200 oil price will see to that.

    Now suppose the RBA doesn’t increase the cash rate while inflation runs at 5%. What happens next? The Australian dollars will go down, leading to even higher inflation, and the Big 4 will raise interest rate anyway. The Central Banks in the 1970s didn’t raise interest rate because they want to : they raised interest rate because they had no other choice.

    • C.M.BurnsMEMBER

      one of many great contributions and insights from the MB punters. It’s a shame that Dave and Leith seem incapable of changing their view on the matter.

      • ” one of many great contributions and insights from the MB punters. It’s a shame that Dave and Leith seem incapable of changing their view on the matter.”
        Agreed. I get a lot out of Ronin’s posts as well.
        While I may have framed my position a little differently from DLS here, I think there is a reasonable point being made that interest rates are not really a good tool to deal with supply side inflation (much better at the demand side of the equation). This is why he is arguing for regulation as it takes the pressure of the RBA to do the heavy lifting. The 1970s had a lot of problems and some of them look similar to the current situation. Unfortunately, we are far more leveraged than we were in the 70s so, any inflation problems are only amplified by hiking interest rates. Concerns about over tightening are justified when seen in this light.

        If things continue as they are for a long time, eventually the cowards in Canberra will work out the RBA can’t handle this situation all by itself. If they don’t, they will be out of office next election.

    • Jumping jack flash

      “Now suppose the RBA doesn’t increase the cash rate”

      It is all relative. Other countries [with debt economies] are currently increasing their rates. Of course there will be macroeconomic forces pushing ours up.

      “The Albo government won’t do anything about energy prices. Action requires courage,”

      No, action requires jurisdiction. Energy is privatised for all intents and purposes. If the government started establishing price controls on private companies we would lose our “free market economy” badge. Plus the private companies would simply cry “we will all go broke” and what would the government do then? Perhaps subsidies?

      • RomulusMEMBER

        Nah – US can reserve gas/ban exports by executive order. Are they a high sovereign risk country as well?
        Sovereign risk to who? Biggest risk is for China. The government needs to informally advise gas exporters to selectively declare force majeure on their Chinese customers to reserve the adequate amount for Australia.

    • Muttafukaburrasaurus.MEMBER

      They lack the courage of Angus Mc Fraud, the greatest mind in the colony.

    • RomulusMEMBER

      +1 – Good analysis. Get ready for the mother of all energy shocks in Q4. Inflation and more 0.5 basis point hikes are coming via petrol/oil price spikes. The only question is how high.

    • So the RBA whack up interest rates and put the TFF cue in the rack just as energy helps gut the economy and the housing market finally discovers reality instead of reality TV. Genius.

  3. Jumping jack flash

    “Wage pressures are mild, nascent, hesitant, and easily crushed. ”

    Indeed! Wages are fickle, and pretty much *depend* on inflation in this kind of economy.
    Its not like all our factories producing useful items to sell to the world for profit are going to ramp up production, increase sales, and pay everyone higher wages.

    No!

    Our wages depend on debt spending on services and imported goods with markup, and the inflation of the giant wad of debt our economy is attached to makes it grow. If it stops or even slows then so do our wages, and our jobs disappear.

    However, looking at the issue from the perspective that we did let the banks go a bit crazy with the keys to the economy (again!), and a bit of demand destruction may be ok considering, and we could even avoid a depression so long as we replace the debt gap with…. socialism… but good luck with that, because we privatise the profits bestowed by our only substantial source of national income – our nation’s natural resources.

    • I don’t know about the rest of the economy but I can say that high tech wages are going ballistic.
      $200K is the new minimum, and for that you’re not getting anything special (couple of year experienced Engineer)
      It’s crazy I’m having to make offers as and when the people appear never mind if I need them right now, never mind cash flow or project schedules, you hire anyone even reasonably good.
      A lot of this seems to be driven by a resurgence in US defense projects, lots of rethinking as plans evolve to fit the new enemy. Anything to do with autonomous defense systems is beyond red hot.

  4. Oh, don’t you worry about house prices, they’ll remain sweet as… after we revisit the Plibersek-McKibbin doctrine.
    Come and buy, no FIRB approvals needed.

  5. Interesting commentary here from Luke Gromen on how high CBs can raise rates before something really breaks: https://www.youtube.com/watch?v=Njyw9OFbyrE
    My own feeling is that the government / RBA will tolerate a 10-15% correction in house prices, after that they will pull out all stops and probably hyperinflate it to the moon…

    • Grand Funk RailroadMEMBER

      Thats pretty much what i think. At some point there will be incentive to reinflate.

      My guess is that 3 years of ALP government would have the Toryniffs going to the next election with some RE madness psychotropics ready to roll

  6. Grand Funk RailroadMEMBER

    It is utter madness, but it it is the denouement of a generation’s utter madness, and the utter madness we simply have to have.

    I find myself wondering if the Board of the RBA bowed to the rising sun and and had a ceremonial glass of sake

    The dynamic between fiscal annd monetary has been a lot like the relationship between the Imperial Navy and Army – never quite in harmony, the occasional atrocity, all wrapped around some behavioural surrealism lightly sprinkled with gibberiing iinsanity.

    Like the WW2 Japanese they have continued their policy long after the limits of it were obvious to all and sundry and thrown zillions under their policy bus.

    And I still think we can anticipate some idiosyncratic behaviours from here on in……….

    They will crash the baby alright

    And those of us in the bus will likely find it painful, annd be in a mood for scalps on the far side.

  7. “The core of it will be house prices, which are about to crash. They will take down the entire services economy with them, followed by the banking system. And for what?”
    For the good of all Australians, that’s what.

  8. Well, it was always going to be policy error (and not a change in policy) that resulted in a significant house price correction but I didn’t think it would come from the RBA.

  9. I look forward to all those celebrating a hard crash to also celebrate losing their income/job/lifestyle. If you don’t understand how houses have infected all parts of our society then go and look again. Consumption, SMB loans with houses as collateral, employment, alternative investment classes.

    Poor will become poorer, the rich will buy a very big dip and ride higher again over the long term. In short, it wont drive a more egalitarian society, it will simply entrench the divide further.

    The better outcome here would have been a slow deflation on overpriced assets (including houses) due to tightening currency supplies (QT already happening), govt policy around energy/fuel to remove non discretionary inflation pressures, wage inflation and govt investment back into manufacturing. Of course, none of this will happen because it requires leaders in govt and govt departments.

    Will great change come out of the crash, perhaps.

    • Ah, of course! Because it’s all their fault, right?
      They made the decision not to partake in the Ponzi, so let them burn on the way down, too?

  10. The Grey RiderMEMBER

    How did we get here?….slowly, then all of a sudden.
    Seeing this unwind in real time is stunning.