Terry tips a hike next Tuesday

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Terry McCrann tips a hike for the Bank’s 2 August meeting.

He thinks that Bank goes on 2 August unless there is a LEH style melt down.

I think the Bank is a 70% chance. Two quarters of high inflation gives them the political cover they need. They can hike here, and if the Cassandra’s are right and the economy cracks, they can cut later. Stevens has form on this — he did the same in late 2007 and early 2008.

But if their forecasts are right, and the boom is only just getting under way, they can’t really afford to wait for Q3 and bank another 0.9%q/q. Don’t believe the hype on the once off stuff — median CPI was 0.9%, so one half the basket is inflating faster than that!

As I have shown in other posts, inflation only really falls when the unemployment rate is rising. If the current inflation pulse is sustained, it simply tells us that the unemployment rate is too low.

That is what happens when you re-regulate markets. The transition path to the new equilibrium is higher inflation, higher rates, and higher unemployment.

Kudos to my friend, Chris Joye who has been a lonesome inflation hawk this past month or so.


  1. yes a rate hike here is a very easy prediction. in the last 6 months it has risen 3.6% at an annualised rate and I know the RBA look at that.

    A lonesome hawk . I don’t think so.

    He would have a bit more credibility if he simply said I wuz wrong and Krugman was right in the US.

    in the UK Adam Posen is saying the same thing. the core inflation rate has only risen because of one-off factors and given the output gap it will fall to 1-2%. If it doesn’t he will resign.

    now that is a call and a half

    1. Yes, I respect Posen for that. And yes I have disagreed with Chris on global policy for similar reasons. The difference with Australia of course is that we have a tight labour market, and good wages growth – both of which are lacking in the USA and UK.

      Sent from my iPad

    2. first, i have the balls to use my own name when posting, unlike the faceless critics here.

      second, errr–Krugman is “right” about the US?

      right about what, exactly?

      right about the claim the US should spend much more money and ignore the fiscal consequences?

      right about the suggestion that the US does not have any inflation problems (to say nothing of artificially debasing its currency by printing money)?

      right about the argument that the the GFC is to blame on excess Asian savings rather than poor US decision-making?

      “On your Marx” you have no clue.

      And “Ricardo”–you disagree with me about what exactly?

      You were telling me **A FEW DAYS AGO** that, quote, “we may have seen the last rate hike this cycle” (ie, before CPI).

      Now you are saying they need to hike “ASAP”!

      Please, some intellectual consistency, fellas.

      I cannot stand people that construct straw-men and disagree for the sake of sounding smart.

      1. Hey Chris,

        the rest of my quote is that “Stevens doesn’t want to hike, and will only do so if pushed by inflation… ”

        As you know I had come to the view that Q1 was probably an aberration, and that Q2 was likely to be substantially lower (0.6%q/q).

        I was wrong.

        There is probably an inflation problem, and I think the most straightforward thing the RBA can do is hike. I think ASAP is best as waiting muddies the waters.

        Finally, we have disagreed for a long time about the right strategy for the bank of England and the Fed. I am much more dovish there, due to weak wages growth and the slack in the labour market.

        I think the important factor is the strength of the union movement and their ability to obtain compensation for headline price increases – Australia and Europe have stronger labour institutions and a tighter labour market, and hence less room than the UK and USA to soak up periods of high headline inflation.

        Nice to have your first comment mate.

  2. we have next to no output gap as you have shown. Thus mining boom means higher interest rates because no government coul implement a fiscal policy to obviate that.

  3. Inflation is up due to food and fuel, both one-off. Core inflation, excluding volatile items, at 0.5% Q/Q and slowing. Most other data relatively weak. According to large retailers a big drop in sales starting from June. Credit growth subdue, ASX falling, house prices flat to down, confidence down. Can wait for more data to come in.

  4. that’s all fine, Ricardo, but does not the efficacy of an inflation targeting regime rely quite fundamentally on the credibility of a target? you cannot ignore high inflation simply because you are running a theoretically large output gap. or am i missing something? this is my beef with the Bank of England particularly, and to a lesser extent the Fed. high inflation will still bleed into expectations with or without an output gap, IMO. so i think you are threatening the stability of the regime by shifting your inflation target based on subjective judgments about the risk of wage-price spirals. sorry about the terse tone above–i am very, very tired.

    1. It sure does. I think the BoE is dicing with trouble, and I am less sure they are doing the right thing. I am, however, quite sure the Fed has been correct to look through the surge in headline and core thus far.

      That is the reason i respect Posen so much. He has put this credibility on the line. It is a tough judgement just now and by doing so he has shown that he has considered the issue seriously.

      It seems more likely every month that the West is looking at a decade of stagflation, as rising eastern demand pushes up commodity prices. Someone has to give up real income.

      The best thing a central bank can do is maintain price stability if that occurs – I think we both agree on that these days.

      Funny how the tide turns, i recall our first conversation was my defending the RBA’s hikes in 2007/8 with something like — they have one task, price stability.

      Sent from my iPad

  5. Chris, just be a man and say you were wrong badly on inflation in the US.
    as he shows here he is right and you badly wrong. where is inflation heading now?

    Put simply he knew it was one-off factors ,as in the UK, because there was no transmission mecchanism to drive inflation.

    in your case it simply was going to happen.
    Thus your argument falls away
    By the way the proposal to provide liquidity to Australia’s securitisation market was made by a major fund Manager!!!

    By the way the Asutralian Government didn’t do anything on what you and joshua Gans proposed. It was Treasury ttalking to a Large fund Maanager that led them to gt into the

    link right now

  6. On your Marx, that is total BS. I was talking directly to the Prime Minister’s office about it in February 2008, a month before we had published our paper (March 2008), and many months before anyone else said it was a good idea. The PMO knew nothing about it (nor did Treasury). We worked closely with the PMO and Swan’s Chief of Staff on this for months, the latter of whom asked us for a specific plan regarding how we implement the idea. Swan’s chief of staff sent us an email after the policy was announced thanking us for our efforts.

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