Australia’s Lowe Is Odd-Dove-Out Among Hawkish Central Bankers

(Bloomberg) -- Reserve Bank Governor Philip Lowe reckons Australia is different to the U.S. and New Zealand when it comes to the threat of inflation.

While the RBA sees core inflation breaking above 3%, Lowe is so confident it will retrace some of that gain that he's experimenting. “I think we can test how far we can get unemployment down without having an inflation problem here,” he said Wednesday, when asked why he was sticking to near-zero rates.

The following charts look at the grounds for the RBA governor's stance.

The RBA's stance contrasts with a Federal Reserve gearing up for hikes to try to rein in 7% inflation and a Reserve Bank of New Zealand that's set to tighten further as it confronts the fastest price gains since 1990.

One key factor is that Australia's inflation started out slower. But unemployment at 4.2% has also failed to unleash stronger pay demands, an anomaly Lowe blames on “substantial inertia” in the pay setting process. This prevents wages from responding rapidly to changed economic circumstances.

Lowe also highlighted that inflation last quarter was largely driven by a spike in gasoline prices and shortages caused by supply-chain disruptions. These factors, he reckons, will begin to unwind as Covid-19 infections ease.

The chart below shows Australia is importing more inflation -- reflected in tradeables prices -- than it's generating domestically, reinforcing the governor's questioning of the durability of the increases.

The smaller gains in non-tradeable inflation, largely affected by domestic variables like utilities and rents, also highlights differences Down Under.

Power prices have been surprisingly weak compared with the U.S. and Europe -- in part due to a faster uptake in solar and wind energy. Australia's competition watchdog expects power bills to remain on a downward trajectory.

Yet Lowe is struggling to persuade markets and economists. They reckon he's overstating the slow wage response, arguing that unemployment tracking to fall below 4% is new territory. Lowe himself conceded Wednesday that rates could rise later this year -- though a hike might also be a year or more away.

High frequency data on payrolls point to faster wages growth, as does analysis of shifts in salaries by Commonwealth Bank of Australia. It predicts annual wages growth will hit 3% in the middle of this year, against RBA estimates for that to occur in 2023, citing internal data from bank accounts.

“There is a growing body of evidence that indicates wages growth has accelerated,” said Gareth Aird, CBA's head of Australia economics.

“Our forecast profile for wages growth and inflation means our call for the RBA to commence normalizing the cash rate in August 2022, give or take a month, remains very much on course.”