THE risk that the carbon tax will trigger interest rate rises is, in the words of at least one economist yesterday, “a foreseeable risk”.
Economists yesterday broadly agreed with the Government’s forecast that the tax would lead to a 0.7 per cent boost to inflation – low enough to allow the RBA to “look through” the rise when considering future interest rates.
But economists agreed this will change if “second-round effects” arise after its introduction next July, the Herald Sun reports.
“The most prominent of these will be if households take into consideration higher levels for prices,” HSBC chief economist Paul Bloxham said, noting that higher wage expectations and higher inflation would be the result.
“There is very little risk interest rates will be lower but there is a possibility interest rates will be higher as a result of the carbon tax, albeit a minor risk.”
NAB chief economist Alan Oster agreed: “The big issue for the RBA is will a second-round effect flow through to inflationary and wages expectations. If they do then we expect the bank will go.”
JP Morgan economist Helen Kevans said the Government’s 0.7 per cent forecast impact on inflation was about right but said it could be as high as 1 per cent in the third quarter next year.
The three economists all agreed that the introduction of the GST in 2000 was the best indicator of how the carbon tax can be expected to play out. The RBA upped interest rates three times ahead of its introduction due to the expected spike in inflation it would cause, and then just once after that.
The carbon tax is raising just a third of the revenue of the GST.
The National Australia Bank is forecasting one interest rate rise this year and another in May.
JPMorgan chief economist Stephen Walters said the RBA had effectively been tightening interest rates ahead of the carbon tax introduction with its string of hikes last year, The Australian reports.
He said the central bank would be concerned if workers worried about the cost of living began pushing for wage rises. “A big threat is going to be wages.
“If we see electricity prices go up by 5 per cent rather than the 3 per cent forecast, the unions are going to start to push for higher wages in addition to the compensation on offer. That is a clear second-round effect and that is when it becomes material.”
TD Securities strategist Roland Randall said the potential inflationary impact could prompt the RBA to keep interest rates tighter than had been anticipated.
Matthew Charles, Herald Sun