MNI INTERVIEW: RBA Could Hike Again - Former Economist
MNI (SYDNEY) - Markets should be ready for another hike by the Reserve Bank of Australia if inflation exceeds its forecasts, a former RBA economist told MNI, noting the bank likely needs to see one or two more quarters of softer inflation before easing policy.
“If we get disappointing inflation numbers, the cash rate will increase,” said Peter Tulip, chief economist at the Centre for Independent Studies and a former senior research manager at the RBA.
The RBA board’s statement following its decision this week to hold the cash rate steady at 4.35% did not line up with its more dovish accompanying forecasts, he said in an interview.
"The inflation forecast in 2026, which is the most important number driving cash rate decisions, got revised down from 2.6% to 2.5%,” he said, pointing to the November Statement on Monetary Policy released alongside Tuesday’s call. “That change in the forecast is a tiny one... but the direction of it, if anything, seemed a touch more dovish.” (See MNI RBA WATCH: Governor Maintains Hawkish Language, Cash Rate)
Another quarter of data that showed underlying inflation trending down could shift the RBA’s tone, or prompt the board to cut, he added. Market pricing now favours an initial April or May reduction.
Tulip, who also sits on the RBA Shadow Board, has criticised the Reserve previously for its unwillingness to hike the cash rate more aggressively. However, he conceded the Reserve’s current settings were appropriate. (See MNI: Over-Optimistic RBA To Be Forced To Hike More-Ex Staffers)
“As to this cycle, one of the lessons I draw is that the RBA should be a bit more aggressive in its policy adjustments, that its gradualism has not delivered better outcomes than in other countries,” he added.
U.S. ELECTION
Tulip downplayed the impact of President-elect Donald Trump’s economic policies on the Australian economy, noting the end result of negotiations with China may not have a great influence on iron ore or coal prices.
"These linkages typically are extremely difficult to see in the data and the Trump administration's hope and expectation is that [its policies] increases U.S. GDP. I don't think this will be a big factor for Australia," he argued.
Tulip’s view contrasts with those of other RBA alumni, such as ex-Board Member Warrick McKibbin, who warn that Trump’s trade policies could stoke Australian inflation.
“How it affects third parties, other countries, is difficult to say," Tulip noted. "It's possible there'll be quite a bit of diversion. That instead of the U.S. and China trading with each other, the trade will go through other countries and maybe that could be good for those other countries."
But these kinds of international trade flows have little impact on Australian monetary policy, he added. "The most important effect comes through the iron ore price, and that's good for superannuation accounts and government tax revenues, but flow-on effects to economic activity in Australia, or even to living standards as measured by short run consumption movements, are tiny."
The iron ore price languished between USD74-77 a tonne over 2018 as Trump’s first China trade war began, but quickly rose to USD120 a tonne by mid-July 2019, despite tensions continuing. Australian export growth to China remained strong until the pandemic, according to Australian Bureau of Statistics data.