Donald Trump does not live tax-free in the head of the central bank.
He’s collecting taxes like the New York property tycoon he was before he moved into the White House, causing pain and heartbreak for those trying to direct fiscal policy.
The Reserve Bank’s decision to raise interest rates on Tuesday – and the risk associated with that move – was driven in large part by the White House’s occupier and his war on Iran.
Yes, the nation was under inflationary pressure before the war began. The rise in rates in February and March was clear evidence that the improvement in low productivity meant that even normal economic growth led to a lift in inflation.
But throw in a war that has driven up prices from oil to fertilizers to helium, and you get a mess that’s causing headaches for every central bank.
The extent of that headache is evident in the RBA’s best guess about how the economy will perform over the next 48 months.
It was a year ago this week that the Reserve issued its then-prediction on the state of the economy in a post-Emancipation Day tax world.
At that time, when analysts feared that Trump would honor his word and impose taxes on everyone and everything (compassion t.Heard Island penguins), the Reserve feared it could lower interest rates to boost the domestic economy.
Fortunately, common sense — especially from financial markets that responded to Trump’s tax plans and one of the worst stock price declines this century — prevailed.
The worst-case scenario feared by the Reserve and many other banks did not materialize.
Now a year on, the bank has set out three different outlooks for the Australian economy. The reason for the swing is not the money rate, but the price of oil.
None of his scenes are “rosy”. His basic forecast assumes that oil will begin to fall from the US$100 a barrel mark very quickly and shipping through the Strait of Hormuz will return to pre-war levels before Christmas.
That gives a recession easily over a per capita recession, high unemployment and high inflation. That’s not good.
But wait, there’s more. Two other scenarios paint a more grim picture.
If oil remains at US$95 a barrel and the Strait of Hormuz does not return to normal until early 2027, the economy will grow by between $35 billion and $50 billion by mid-2028. Inflation is at 5.2 percent by June while unemployment is up five percent.
The worst case scenario occurs if oil pushes towards $US145 a barrel (which some experts believe is on the cards). Under that scenario, the economic gain is close to $60 billion with about 120,000 additional Australians out of work.
About the only positive is that if the bank moves interest rates in line with what investors expect – and at least one rate increase by the end of the year – then inflation will fall faster than the Reserve was expecting before the war.
Inflation may return to 2.4 percent in the middle of next year. That’s half a percentage point lower than the Reserve’s forecast in February.
It could hang in the middle of the RBA’s target band of 2-3 percent for at least the next 12 months. For a bank that has not met its target since Tony Abbott became prime minister, that could be interpreted as a major victory.
But such a victory will come at a cost. The cost will be measured by the decline in real wages. In the decline in the number of houses being built. In abandoned business plans to expand. In the tens of thousands of additional people who are unemployed.
As bank governor Michele Bullock suggested, interest rates might have been kept under control on Tuesday but for the war.
Sadly, the situation could be worse. Some countries have already been forced to ration fuel as they struggle to find enough supplies.
Bullock confirmed the formation of the bank does not cause the effects of the shortage of oil (and other hydrocarbons). Consider the possibilities and possibilities of registration of cars to buy petrol, reduction of fertilizers for farmers, supply of diesel to heavy industries instead of Toorak tractors.
“If that had happened, I think we are in a very different world, and we would be looking at things differently in the economy,” he said.
Just another expense from our New York tycoon, Donald Trump.
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Shane Wright is the senior economics writer for The Sydney Morning Herald and The Age.Connect through X or email address.
