Inflation

The governor conceded on Tuesday there was an argument that the RBA should have stayed in the market to achieve its stated objective.

“We had this target and you could argue we should keep on buying the bonds until we had formally dropped it, but there were a couple of considerations in not doing that,” he said.

“The first was that with yields having moved so much, and the swap curve and all other rates, it would have been difficult to achieve a yield of 10 basis point; in fact, I don’t think it would have been achievable.

“We would have been buying all the freely floating stock and not achieving anything, so that didn’t seem a sensible thing to do.”

The other consideration related to the RBA’s all-important communication function.

“If we had done that, you would have rightly been asking today why we continued buying this bond, and it was ultimately unsuccessful, in the full knowledge that the distribution of risk was shifting away to make the target unsustainable,” Dr Lowe said.

“So I used the discretion that I have as governor to stand out of the market.

“We had stood out of the market on previous occasions, not as dramatically as this one, but I thought that was the best course of action.”

Dr Lowe was asked if he would consider reintroducing yield curve control if the nation faced a similar crisis of the magnitude of Covid-19.

He responded that the RBA would have to consider the lessons learnt, but thought on the whole it was unlikely.

“It was very much a policy for a specific period in our history,” he said.

“I look back on the explanation I gave in March last year when we introduced that target and part of it was that we wanted to directly target a yield curve rather than buying government securities.

“I thought that was the right thing to do at the time, but as time passed, other central banks were doing quantitative easing and I thought we were paying a cost in financial markets for not doing that as well.

“So we went back and did the QE that we elected not to do in March.”

As a central banker, though, you never want to rule anything out completely, particularly when you can’t possibly guess the origin of the next crisis.

“Who knows?” Dr Lowe said.

“In January 2020 I didn’t think we’d be doing it a couple of months later, so stuff can change. But it’s pretty unlikely.”

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Commonwealth Bank has no advertised home loan rates under 2 per cent for the first time in a year after it hiked its fixed rates for the second time in three weeks.

On Friday morning CBA raised its one to five year fixed rates by between 0.1 and 0.5 per cent.

It means CBA's last remaining sub 2 per cent fixed rate – its one year option – has lifted 35 basis points to 2.34 per cent.

Australia’s largest bank has followed Westpac, which on Thursday hiked its fixed rates for the second time in two weeks.

It appears the banks are racing each other to raise fixed rates.

The move by the banks is pointing the way for the home lending market, after the Reserve Bank of Australia was forced to back down on its attempts to keep short-term debt costs low.

It comes after a surge in bond yields after blowout CPI data last week, which led the RBA to walk away from its short-term bond yield target.

In the last month, 25 lenders have lifted five-year fixed rates.

RateCity research director Sally Tindall said it was likely the Reserve Bank of Australia’s shift in monetary policy this week spurred the move from Westpac with more banks to follow.

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Wednesday’s U.S. consumer price index for October came in hot, at up 0.9% and up 6.2%, year-on-year. The CPI was expected to come in at up 0.6% from September and up 5.9%, year-on-year. The October numbers are the highest U.S. CPI readings in over 30 years. Tuesday’s U.S. producer price index showed a rise of 8.6%, year-on-year.
Meantime, China’s producer price index on Wednesday was reported up 13.5% in October, year-on-year, and up from a 10.7% rise in September. That is the fastest factory gate price rise on recent record. Extreme weather and coal shortages are being reflected in China’s rising PPI.
Just recently, several Federal Reserve officials seemingly grudgingly are coming around to the notion that rising inflationary pressures are something more than just “transitory.”

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Reserve Bank governor Philip Lowe says Australia will not be sucked into a “perfect storm” of global inflationary pressures, as minutes from the last RBA board meeting revealed that a rate rise in 2024 remained the “central scenario”.
Amid fears rates could rise as soon as next year, Dr Lowe repeated that “the latest data and forecasts do not warrant an increase in the cash rate in 2022”.

“The economy and inflation would have to turn out very differently from our central scenario for the board to consider an increase in interest

In a speech to the Australian Business Economists, Dr Lowe listed the reasons why fears of consumer price contagion from overseas was overstated.

These included what he saw as Covid only temporary impact on global supply chains, and that Australia’s $89bn JobKeeper program had minimised the labour market shock being felt overseas, and so kept wages growth in check despite reports of worker shortages.

Dr Lowe said “inflation in many countries rose as increased demand for goods quickly ran up against a supply side that was not flexible enough”.
“In some countries, developments in energy markets, partly due to adverse weather events, have added to the upward pressure in inflation. Although there is some uncertainty, it is likely that inflation from these sources will moderate over the next 18 months as demand rebalances towards services and the supply of goods adjusts,” he said.

Dr Lowe said that most central banks around the world forecast inflation pressures will ease sharply in 2022, in part due to some actual or expected policy tightening.

“This is consistent with the view that the current increase in inflation is only transitory and that a period of contractionary monetary policy will not be required to return inflation to target,” he said.

Dr Lowe said the labour market was “critical” to whether the Covid-related price pressures became entrenched in sustainably higher inflation.

“It is unusual to have persistently higher inflation without persistently higher wages growth (unless there is a shift lower in labour productivity growth),” he said.

“The two generally go together. There have been historical exceptions to this, and other factors that affect firms’ costs and mark-ups can have persistent effects. But at the current juncture, the labour market is the key.”

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mullokintyre said:

he and his cohorts need to get out more and see what the less well off are faced with.

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Westpac has lifted its fixed rates for the third time in four weeks as the major banks retreat from record low lending rates eagerly snapped up by borrowers.
The big bank moved to hike its owner-occupier and investor rates, leaving no loan package on offer for less than 2.24 per cent.

Westpac’s three-year fixed rate loan saw the largest lift in borrowing costs, up 0.3 per cent.
The increase, while small, pushes the potential monthly repayments on a $500,000 loan up by $78 per month.

The changes affect both owner-occupier and investor rates across the Westpac Group including St George, Bank of Melbourne and BankSA.

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Westpac’s rush illustrates the rapid pace at which banks are rethinking their lending rates as they look to backstop margins in the face of offshore funding cost hikes.

Westpac joins a throng of other lenders, with 16 banks pushing up fixed rates at least twice in the last month.

Westpac first increased two- to five-year rates by 0.10 per cent on October 19, before upping three- to five-year rates by between 0.10 per cent to 0.21 per cent on November 4.

RateCity research director Sally Tindall said banks had “hit the accelerator on fixed rates”, with many moving to raise rates faster and more often.

“At first, the fixed rate hikes were isolated to longer-term rates, but now banks are lifting across the board at an extraordinary pace,” she said.

“These fixed rate hikes are more than speculation the cash rate could rise earlier than expected. The cost of wholesale funding is increasing, and the banks have decided it’s not sustainable to keep fixed rates at ultra-low levels.”

Ms Tindall said although the cash rate had not yet moved, the cost of wholesale funding was rising and banks were being forced to respond.

“The cost of wholesale funding is increasing, and the banks have decided it’s not sustainable to keep fixed rates at ultra-low levels,” she said.
The hike comes as the Reserve Bank of Australia on Tuesday said a cash rate rise in 2024 remained its “central scenario”.

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mullokintyre said:

From Todays Oz




It is becoming more and more obvious that the interest rate momentum has left the RBA behind.
I very much doubt that WBC is the only bank that is having trouble accessing depositors funds to lend out.
All I am waiting for now is the ba$tard$ to start increasing deposit rates.
Mick

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I thought inflation in ags and food was transitory. I feel less so now because of continued shortages in labor markets," "That's one of the inputs to the supply chain that we're watching most carefully."

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mullokintyre said:

Carghills is one of the larger food conglomerates on earth.
Its CEO, Dave Maclenna, has recently changed his mind about the transitory nature of inflation.
In an interview with Bloombergs
he said

The global food index may break into territory not seen this decade.


View attachment 133196

I guess for the wealthy elites, this is not big deal, as long as the supply is there.
if you can pay $5,000 for a gucci handab or $10,000 for a pure Alpaca wool coat, having your food prices double or even triple is of no great concern.
For those at the bottom it is of great concern.
Mick

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over9k said:

Think about how much energy is a primary input into even food production

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Smurf1976 said:

Something I'll add for those not aware is that ammonium is produced from natural gas.

That's not simply using gas to run the factory as an energy source but gas is the actual raw material feedstock from which ammonium is made. That's not the only way to make it but it's the major commercial process in current use.

So there's a very direct link there between natural gas prices and the cost of making ammonium fertilizer which is itself an agricultural input.

In the opposite direction, various agricultural crops can be processed to produce ethanol which can be (actually is) used as a blending component in petrol. Any rise in the price of oil thus increases the price point up to which it's profitable to add ethanol, or to add more than would otherwise be added, which then diverts some food crops into producing that ethanol.

So there's two very direct linkages between energy commodities and human food without even mentioning the fuel used in transport, farm machinery, food processing plants and so on.

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Smurf1976 said:

Something I'll add for those not aware is that ammonium is produced from natural gas.

That's not simply using gas to run the factory as an energy source but gas is the actual raw material feedstock from which ammonium is made. That's not the only way to make it but it's the major commercial process in current use.

So there's a very direct link there between natural gas prices and the cost of making ammonium fertilizer which is itself an agricultural input.

In the opposite direction, various agricultural crops can be processed to produce ethanol which can be (actually is) used as a blending component in petrol. Any rise in the price of oil thus increases the price point up to which it's profitable to add ethanol, or to add more than would otherwise be added, which then diverts some food crops into producing that ethanol.

So there's two very direct linkages between energy commodities and human food without even mentioning the fuel used in transport, farm machinery, food processing plants and so on.

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Smurf1976 said:

In the opposite direction, various agricultural crops can be processed to produce ethanol which can be (actually is) used as a blending component in petrol. Any rise in the price of oil thus increases the price point up to which it's profitable to add ethanol, or to add more than would otherwise be added, which then diverts some food crops into producing that ethanol.

So there's two very direct linkages between energy commodities and human food without even mentioning the fuel used in transport, farm machinery, food processing plants and so on.

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Consumer-price inflation in the eurozone likely hit a record high in November, but many economists think that might mark a peak for now, and therefore don’t expect the European Central Bank to raise its key interest rate next year.

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As in the US, consumer prices in the eurozone have risen faster over recent months than most economists and policy makers had expected. The data have raised questions for investors, businesses and households about the credibility of central bank assertions that this period of high inflation is likely to prove transitory.

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Many private economists forecast that inflation in the eurozone will decline significantly at the start of the year, echoing the ECB’s view that the period of rapid price rises will be short-lived. The firms sharing this view include UBS, Morgan Stanley, BNP Paribas and Oxford Economics.
The European Union’s statistics agency is expected to estimate Tuesday that prices were between 4.3 per cent and 4.5 per cent higher in November than a year earlier.

That would mark the fastest annual rise in prices since records began in 1997. During those 24 years, the inflation rate has only exceeded 4 per cent in two months, the first of those being July 2008, and the second October of this year.

The ECB is scheduled to set out in December its expectations for 2022. But policy makers are unlikely to announce any moves to counter the inflation surge, other than confirming that a bond-buying program launched to soften the economic impact of the pandemic will end in March.

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The new EBA announced includes a wage increase between 9.25 per cent and 9.75 per cent subject to Consumer Price Index (CPI) over three years, as well as an additional 2 per cent increase in superannuation during a three-year period, reaching 13 per cent in 2023.

The agreement also includes a commitment from both parties to review the agreed wage increase at the two-year mark against the Consumer Price Index, capped at 3.5 per cent.

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Smurf1976 said:

Without criticising anyone personally, I think a problem with all economic actions by governments and central banks is that those making the decisions often aren't seeing it first hand.

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