By business reporter Michael Janda
Updated Wed 23 Apr 2014
Photo: Economists say the Reserve will be left unmoved both by today's inflation numbers and the Treasurer's apparent entreaty. (Will Burgess, file photo: Reuters)
Today's lower-than-expected inflation reading is not low enough to force the Reserve Bank to change tack on rates, even if that is what the Treasurer would like it to do.
Yesterday, the Financial Review reported that the Commonwealth Treasurer has expressed displeasure to the RBA about its February shift to a so-called "neutral bias" - where the bank is leaving interest rates on hold with a view that the next move is equally likely to be up or down.
Coming off the what had been a long-term "easing bias" - where the bank flags that future rate moves are likely to be down - the move to a neutral bias has been widely interpreted by rate watchers as all but a declaration that the next move will be up, with the remaining question being when that move will occur.
This has been one factor that has seen the Australian dollar rebound against the US currency from a low around 86.7 US cents in late January, back to a recent high above 94 US cents.
It is this move in the currency that the Fairfax press says displeasured the Treasurer, because of the extra challenge it poses for Australia's economy in its transition away from mining investment-led growth to expansion in the dollar-sensitive manufacturing, tourism, education and agricultural industries, amongst others.
Whatever Mr Hockey thinks of this shift in the central bank's stance - and his office has not challenged the accuracy of the AFR report - BT Financial Group's chief economist Chris Caton says it is unlikely to change the RBA's position.
"Maybe these sort of things happen more often than we know," he said.
"My suspicion is the Reserve Bank may well say, 'Well thank you for your opinion', and go on and do exactly what it was going to do anyway - that's what it should do."
In Mr Caton's view, what the Reserve Bank should do, given today's lower-than-expected March quarter inflation figures, is to maintain its neutral stance and look at other economic and financial indicators, such as unemployment, home prices and the exchange rate.
He hopes the Government will resist the temptation to offer further advice to the bank, to avoid damaging even the perception of its independence.
"The view around the world is that monetary policy is best administered by a politically neutral, independent authority," Mr Caton added.
While today's Australian Bureau of Statistics inflation data for the year to the end of March came in well below analyst forecasts of 3.2 per cent, the 2.9 per cent reading is only a whisker below the Reserve Bank's 2-3 per cent target band.
The bank's preferred measures were a bit lower, at 2.6 and 2.7 per cent for the year to March, but still in the top half of its target range, and at the highest levels in just over two years.
Combined with soaring home prices - which are mostly uncaptured in the consumer price index - and strong employment growth over the first few months of the year, most economists agree that the RBA returning to an easing bias is highly unlikely barring a major domestic or international economic shock.
In other words, the next rate move will almost certainly be up but, if these sort of inflation readings continue, it may not be until well into next year.
