In November last year, Terry McCrann lambasted the Reserve Bank of Australia (RBA) for leaving interest rates at “highly stimulatory” levels (see here and here).
“Even if it [the RBA] follows through with another 50 points in December, taking its rate to 3.6%, the real rate would still be a highly stimulatory minus 3.7%”, McCrann argued in November.
“Two 50-pointers before Christmas is the very least it must do”.
McCrann claimed that allowing inflation to remain above the target range for too long would heighten the risk of a wage-price spiral.
In turn, increasing wages in line with the inflation rate would inevitably result in large-scale job losses and further boost inflation.
In late January, McCrann urged the RBA to hike by 50 basis points at its February’s meeting, again sighting a wage-price breakout.
“The RBA has to go 50 points and not 25”, McCrann said.
“It’s not global inflation that threatens us, but a local wages breakout off the back of those yesterday inflation numbers and a still very tight labour market”.
“If wage rises do kick up to the 5-6% range, or even worse, higher, we will be locked into a wages-prices spiral, irrespective of global inflation; and then face the prospect of serious interest rate pain, in a milder version of 1990”.
“In short, better another, say 100 points now – starting with 50 Tuesday week, than 200-300 points or even more desperately later”, McCrann wrote.
However, following softer than expected wage growth over the December quarter, and moderating monthly inflation, McCrann is now seemingly singing RBA governor Phil Lowe’s praise and calling for his term to be extended.
“Philip Lowe will have gone from “zero” to “hero” if Tuesday’s rate hike is the last in the current cycle and it might just extend his term as RBA governor”, McCrann wrote on Wednesday.
“It is now all about wages… Over the December quarter the WPI (wage price index) was up 0.8% and 3.3% for the year. That’s right on Lowe’s “narrow path”.
“If he can do it with a policy rate that tops out at Tuesday’s 3.6% – and so, no further punishing home loan rate rises – he will have done so with both a lot less rate pain, and a lot less economic and jobless pain, than most other countries”.
“It would also play into any possible extension as Governor”, argues McCrann.
Terry McCrann’s panic over a wage-price spiral was always nonsensical. This is not the 1970s:
Workers today have far less bargaining power, which is being reduced further by record immigration flows.
Commentators also need to acknowledge that monetary conditions will tighten anyway due to nearly one quarter of mortgages by value this year that will shift from cheap pandemic fixed mortgages to variable mortgages with rates that are more than double current levels:
As it stands, many thousands of borrowers risk being pulled deep underwater as their fixed rate terms expire over coming months.
