Donald Trump is not living rent-free in the heads of central bankers. He’s ratching up rents like the New York property tycoon he was, creating pandemonium and pain.
He’s ratching up rents like the New York property tycoon he was before moving into the White House, creating pandemonium and pain for those trying to direct monetary policy.
The decision by the Reserve Bank to lift interest rates on Tuesday - and the associated risk with that move - was driven in large part by the occupant of the White House and his war against Iran. Yes, the nation had inflation pressures before the war began. The rate hikes of February and March were clear evidence that low productivity improvement meant even modest economic growth resulted in a lift in inflation.
But throw in a war that has pushed up prices from oil to fertiliser to helium, and you get the mess that is causing headaches for every central bank. The intensity of that headache is evident in the RBA’s best guess on how the economy will perform over the next 48 months. It was a year ago this week that the Reserve released its then prognostications on the state of the economy in the post-Liberation Day tariff world.
At the time, when analysts feared Trump would honour his word and inflict tariffs on everyone and everything .
Under that scenario, the economic hit is closer to $60 billion while about 120,000 extra Australians are out of work. About the only positive is that if the bank moves interest rates in line with what investors are expecting - with at least one more rate hike by year’s end - then inflation will fall quicker than the Reserve had been anticipating before the war. Inflation could be back to 2.4 per cent by the middle of next year.
That’s half a percentage point lower than what the Reserve forecast in February. It would hang around the mid-point of the RBA’s 2-3 per cent target band for at least the next 12 months. For a bank that hasn’t hit its target since Tony Abbott was prime minister, that could be construed as a big win. But such a victory will have come at a cost.
The cost will be measured in falling real wages. In a drop in the number of homes being built. In the abandoned plans of businesses to expand. In the tens of thousands of extra people out of work.
As bank governor Michele Bullock suggested, interest rates may have been held steady on Tuesday but for the war. Sadly, the situation could get worse. Some countries have already been forced into rationing fuel as they struggle to get adequate supply. Bullock confirmed the bank’s modelling does not factor in the impact of possible shortages of fuel .
Think odds-and-evens on car registrations to buy petrol, a reduction in fertiliser to farmers, diesel supplies limited to heavy industry rather than Toorak tractors.
“If that were to happen, I think we’re in a very different world, and we’d be looking very differently at the way things are panning out in the economy,” she said.
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