The RBA is damned either way

It’s days like tomorrow when the RBA board members really earn their monthly lunch in the Martin Place headquarters of our central bank.

Last week’s official consumer price index data for the June quarter showed inflation is clearly on the march. For the second consecutive quarter, inflation data was much stronger than most economists had expected.

As ICAP economist Adam Carr argues today in Business Spectator, in a “sane world” the RBA would have little choice but to increase interest rates.

But he believes that is unlikely to happen.

“I don’t think we live in a sane world. We live in a world where some board members stubbornly refuse to acknowledge that inflation is on the march, despite very clear supporting evidence.”

“We live in a world where, despite two of our largest retailers posting solid sales growth and record sales, people talk about the retailing recession. We are in a world where the earth is flat!”

Carr believes that while the RBA isn’t buying the retail recession argument, the bank itself “appears to have been rolled by board members who seem to prefer the whispers of the club, the grapevine and anecdote, to hard analytics”.

His argument is that economic growth and inflation is growing, even if retail sales are not. And the RBA needs to act.

Of course, there are lots of retailers who would be queuing up to have Carr spend a few days at the registers of their stores.

Retailers believe that shattered consumer confidence, rising costs (particularly labour) and the growing threat of eCommerce are set to force more retailers out of business, after the spectacular collapse of groups such as RedGroup Retail (Borders and Angus & Robertson) and Colorado Group.

A rate rise, they believe, would force consumers even further into their shells – as happened in November 2010, when a surprise rate rise set the scene for an ugly Christmas and a frankly horrible New Year.

So which way should the RBA jump?

I think the bank will be able to find enough reasons to hold off tomorrow, including the state of the retail sector, soft consumer and business confidence, the US debt crisis and the ongoing situation in Europe.

The bank could even delay the need for a rate rise by talking tough in the Governor’s statement that will accompany tomorrow’s rate decisions. A bit of “jawboning” about the need to raise rates in the near-term is likely to have a similar impact as an actual rate rise.

But I think Carr is right. There’s no escaping the hard data around inflation and the expectation that the RBA will have to lift rates before the end of the year looks likely.

A hike might not happen tomorrow, but it does look like it’s coming.

Retailers better be ready.

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