Distributive policy

The laissez-faire monetary policy is here to stay

In today’s Money Morning…how much inflation is good inflation?…making hay while the sun is shining…if you thought the speculative frenzy was over, don’t count on it…and more…

Yesterday RBA Governor Philip Lowe described ‘the year ahead’.

In a lengthy speech to the National Press Club, Lowe detailed his thoughts on the Australian economy and the RBA’s role for 2022. It’s a prediction that coincided with the end of the somewhat controversial bond-buying program of the central bank.

But it was clear from Lowe’s speech that inflation was the real goal:

As I have said on other occasions, the Commission will not raise the cash rate until inflation is permanently between 2 and 3%.

Based on the evidence we have, it is too early to conclude that inflation is sustainably within the target range. In terms of core inflation, we have just reached the midpoint of the target range for the first time in over seven years. And this follows very significant disruptions to supply chains and distribution networks, which are expected to be resolved in the coming months.

We are in a position where we can take some time to get more clarity on these different issues. Countries with higher inflation rates have less room to maneuver here. The Board stands ready to be patient as it monitors the development of the various factors affecting inflation in Australia.

How much inflation is good inflation?

Now, I realize that’s a big quote I just threw at you, but it’s extremely important, in my opinion.

Because not only does it show what the RBA is thinking, but it shows that they still feel like they’re in control right now. And for now, I’m certainly not going to oppose it.

It’s probably too early to raise rates.

But I really hope Lowe and his peers don’t fall asleep at the wheel. We have seen how Jerome Powell’s comments on “transitional” inflation have aged badly. And I wouldn’t be surprised if the claim’countries with higher inflation rates have less room here‘ ends up being turned off too.

Don’t get me wrong, I’m not trying to suggest that inflation will be Become uncontrollable. I just worry that the RBA is too focused on its core inflation target.

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After all, I’ve been pretty vocal in the past about the shortcomings of how inflation is measured. The CPI, for example, (which measures headline inflation) is far ahead of the RBA’s preferred metric: core inflation.

For reference, CPI inflation is 3.5% for 2021, while core inflation is 2.6%.

Also keep in mind that the CPI doesn’t even measure the cost of buying an existing home. Only newly built houses are taken into account in the metric. That means one of the biggest purchases most individuals or families will ever make isn’t even represented in the data.

So if Lowe feels too comfortable waiting and watching, it could lead to a catch-up game. This is a situation that could hypothetically see inflation flee the RBA and wreak havoc on the economy.

However, these are medium to long term risks and concerns, in my view.

Because in the short term, Lowe’s message suggests that the party is not over!

Make hay while the sun shines

Martin Wolf of FinancialTimes wrote an excellent article on the dilemma facing central banks – an article primarily aimed at the Fed, but which also has implications for the RBA and other institutions.

As he said:

In 1955, President William McChesney Martin remarked that the Fed “is in the position of the chaperone that ordered the punch bowl removed just when the party was really heating up.” It was sound advice, as the currency turmoil of about two decades later demonstrated. Losing control of inflation is politically and economically damaging: restoring control usually requires a deep recession.

The lesson being that once the cat is out of the bag, it’s far too late.

This is what makes me a little uncomfortable with the lax attitude of the RBA.

However, I can certainly agree with Lowe that we are not as far as the United States seems to be…at least not yet…

So, in the meantime, that means the short-term market outlook should be overwhelmingly positive. Because while bond buying may be over, this cautious approach by the RBA may mean the party can continue – albeit a tad muted compared to the past two years.

In other words, if you thought the speculative frenzy was over, don’t count on it.

The final merger may still be ahead.


Ryan Clarkson-Ledward,
Editor, silver morning

PS: Ryan is also the editor of Australian Small-Cap Investigator, an equity newsletter that tracks promising small-cap stocks. To find out how to subscribe and see what Ryan is telling subscribers right now, click here.