25 January 2023

Another rate rise will just inflict pain and risk crashing the economy

| Ian Bushnell
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More interest rate rises will do more harm than good, especially for wage earners already struggling with cost of living increases. Photo: File.

How much tough love can the Australian economy bear?

The economic fortune tellers have locked in yet another rate rise in February after this week’s inflation figures checked in higher than expected.

It’s a gimme, they say, as our hairy-chested Reserve Bank does battle with the inflationary demons, all for our own good (of course), but do we really need another rate rise?

Overseas, the inflationary entrails are pointing to prices falling and have been doing so for a while.

China is reopening and the shipping logjam is freeing up.

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Here, the latest figures for the December quarter have been driven by domestic and international holiday travel (no surprise) and electricity bills, particularly in WA, even though wholesale prices have now halved, pointing to less shock in coming months.

We’re still paying more for food and fuel than we did a year ago, but prices are coming off their spikes, as are construction costs.

The economy is slowing with fewer house starts and rising unemployment, and once the Christmas sugar has passed through the system, consumers with higher mortgage repayments and rents are going to start feeling even more pain and look to cut spending on top of previous economising.

Watch for retail spending to nosedive as consumers cut back and keep their hands in their pockets.

There is a good chance that the Reserve, in its zeal, will overshoot the runway just as it kept rates low for too long and foolishly predicted no rises until 2024.

Its one-dimensional approach to inflation will not just risk a recession but inflict more suffering on families – particularly workers whose real wages have been falling for years – facing a mortgage cliff and boosting the prospect of distressed sales.

Meanwhile, landlords are passing on their increased mortgage costs to tenants, exacerbating rents already fuelled by a shortage of supply.

The Reserve’s unprecedented rate rise climb has had an impact – although one of its biggest, house prices, oddly isn’t considered in the CPI – and more is still to flow through.

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Maintaining such an aggressive posture and lifting rates next month and, as some are saying, again in March, will be overkill.

The inflation number may come down, but how much will be due to interest rate rises when there have been so many external factors – natural disasters, war and COVID?

And at what cost?

It may be a victory for the purists, but what’s the point if the economic landscape is a smoking ruin?

It’s not just a matter of timing but how the Reserve currently wields monetary policy with such a narrow view of the economy.

That’s something the current review of the Bank is looking at.

Considering the Reserve’s recent performance and subsequent erosion of trust, it is hoped that business as usual will not be the outcome.

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HiddenDragon8:03 pm 30 Jan 23

The RBA is a branch office central bank in a branch office economy.

They have some latitude to depart from the marching orders delivered from time to time at Jackson Hole, but not much – their foot dragging exceptionalism on interest rates is looking increasingly like a failed and misguided strategy so (to use an over-used phrase on this site), like it or not, more rate rises are on the way.

Many people hope the RBA raises the interest rates higher, as hopefully this means house prices will drop substantially. There are many who are waiting to buy property once house prices go down. The worst outcome will be if interest rates continue to go up, but house prices do not go down enough…

I get an aged pension and a CSS pension. when l get a CPI increase Centrelink take the full amount plus take the full increase off my husband who doesn’t have a CSS-only aged pension is the correct

As an accountant, I know people who are well off and others who are not. Both are still spending. In fact, the people I know who are not so flush with cash are spending as before. They complain they have no money but it doesn’t seem to stop them eating out or spending money at the grog shop.

Capital Retro12:20 pm 30 Jan 23

Canberra auction clearance rate at weekend was 41% (Zango). Hasn’t been this low for a long time. It is time to cease interest rate increases but the RBA will get it wrong again and go the other way.

devils_advocate9:51 pm 28 Jan 23

“ Meanwhile, landlords are passing on their increased mortgage costs to tenants, exacerbating rents already fuelled by a shortage of supply.”

Oh come on now Ian surely you jest

These private landlords are running a charity are they not?

Why would they raise rents when they could just absorb the increased rates, land tax and stamp duties out of their own well-lined pockets?

Rising corporate profits is the biggest cause of our inflation. That would say to me they need to pulled into gear – increased tax rates for them to lower prices?https://www.smartcompany.com.au/finance/economy/corporate-profits-nflation-wages/

It makes no economic sense that increasing corporate taxes will lower prices. Businesses pass on all tax hikes onto the consumer a la the GST. Also guess where everyone’s superannuation is invested. Hurt the corporations and the mum and dad investors will be hurt the most!

Everywhere I look I don’t see anyone struggling to be honest. People are still going out to restaurants, buying gifts, going on holidays, buying coffees like before. The rich that is. There may be poor people struggling but guess what? When it comes to the aggregate economy it’s only the actions of the rich that matter. For example a wealthy person whose consumption is ten times that of a poor person. If he halves his spending it would hurt the economy a lot more than the poor person. But that isn’t happening anytime soon. The rich have amassed huge savings during COVID boosted by government stimulus such as Jobkeeper. We rode the gravytrain and it has a long way to go yet!

devils_advocate11:28 am 30 Jan 23

1) what you are describing is selection bias. If you go to a restaurant by definition the other people you see there are the people who can also afford to eat at the restaurant, the others who can’t afford that are at home or will arrive to collect you after your meal because they’re working a second rideshare job to pay the bills.
2) rich people don’t typically consume ten times more than poor people. They usually have a higher rate of savings. Poor people have a much higher “propensity to consume”. In addition being poor often leads to very inefficient spending habits.

You are probably right about one thing. Technically our consumption may not be much because we write it all off as business expenses. I get a brand new vehicle, computers, etc each year just so I can claim the $150k from the government. The poor are spending most of their money on alcohol, cigarettes and gambling. Poor them, guess they need more government welfare to fuel their addictions and keep the economy going?

ATO auditors would love to have a chat to you about 100% business use and no apparent trade ins on all your work related vehicles and computers. Then again it you make it sound like you earn enough money just to bin last years buys. Maybe you should think of donating some of your wealth to those less fortunate than yourself.

Lol ATO auditors can come and take a look at my books at any time. I have all my receipts and tax invoices in a box where I keep used toilet paper. I run an SME, we are what saved the economy from COVID!

In 1990 home loan interest rates in Australia reached 17.5%. It was tough. Incomes were not keeping pace. Young couples, families, single and double income households all had to cut back on expenditure and luxuries. How much further could rates rise was the big question. But we got through it. What are home loan rates now? Potentially, depending on overseas interest rate rises which Australia cannot avoid, our rates could still go much higher.

Capital Retro3:51 pm 30 Jan 23

I think home mortgage rates hit 17.5% earlier than 1990. In fact, i was paying 22.5% as I had a house interstate that I left to move to Canberra in 1983 and because I rented it out because I couldn’t sell it, one of the big four banks slapped on a 5% penalty on me.

I had this conversation with my children who knew we were paying 17.5 % interest but as they informed me, house prices were a lot cheaper than the million$+ cost of their 2020 homes. Their double income salaries were inconceivable to most of us 35 years ago.

Capital Retro8:58 am 27 Jan 23

Thanks to Keating, banks were deregulated about 35 years ago so the controls that served us well for many years like increasing the statutory RBA deposits were scrapped.

We never heard the phrase “credit squeeze” after then.

Although largely driven by overseas factors, the Reserve Bank does need to act to rein in inflation.

It will hurt those who have overextended themselves but why should they be anywhere near our first thoughts?

Some balance will be needed but it’s unlikely for this to occur before the middle of the year.

I’m not an economist, but if you raise rates and the flow on effect is higher prices all along the supply chain, causing even more inflationary pressures, as well as reports of house sales down 42% – how is continually raising rates going to cool the economy?

It is ironic that key inflation drivers included imported-fuel prices, and global market linked domestic gas prices.

If only we had technology that could generate energy without fuel, and transport that could use this instead… if only….

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