26 October 2023

Melbourne Cup day rate rise would be a bad bet

| Ian Bushnell
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The price of fuel is burning a hole in people’s pockets. Photo: James Coleman.

Many economists seem to be betting on a Melbourne Cup day interest rate rise after inflation skipped away, if not galloped, in the September quarter.

Amid reports of a hawkish Reserve Bank Governor Michelle Bullock and the need to tighten monetary policy – that is, squeeze Australians till the pips squeak – the mood is pessimistic.

Trouble is, Aussies are already reining in their spending where they can, but there is not much they can do when it comes to filling up the car or truck, paying the rent or keeping the lights on as the latest electricity bill arrives.

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The biggest contributors to the September rise were fuel, the cost of a new dwelling purchased by owner-occupiers, rents and electricity.

Lifting interest rates will have no effect on any of these things.

The biggest factor, fuel, is in the hands of the oil cartels and the latest geopolitical crisis, this time the Hamas-Israel war.

The price of new homes depends on construction costs which, as anybody who has been building a house or buying off the plan can tell you, have been going through the roof since COVID.

Rents and electricity are a couple more of those so-called non-discretionary items; that is, there is no alternative but to keep forking out if you want to keep a roof over your head and not eat by candlelight.

These unavoidable outlays are already eroding spending power and slowing the economy.

With previous interest rate rises still filtering through the economy, another rise now would risk slamming on the brakes, bringing matters to a screeching halt altogether and raising the spectre of the R word.

Many homeowners with a mortgage who are already clinging on by their fingernails might be sent over the edge, especially those coming off fixed mortgages, creating a flood of forced sales.

That sort of collateral damage in the war on inflation for next to no effect would not be in the nation’s interests, unless, of course, the Reserve Bank feels this would be a good way to bring house prices down.

The Reserve Bank continues to be a one-trick pony that will only offer pain and no gain if it insists on lifting rates on Tuesday after a five-month pause.

The government is already doing some things to mitigate prices, such as increasing rent assistance and electricity rebates, but the latest fuel spike only reinforces the need for Australia to wean itself off its oil addiction.

It should be doing more to boost the uptake of electric vehicles, such as establishing a new emission standard to attract more models to Australia and help bring down prices, and ramping up the charging infrastructure they require to engender confidence in the motoring public.

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The shift to renewables may be on, bringing down the wholesale cost of electricity, but the transition needs to be faster, especially with the old coal burners going out of business.

Attacking these big-ticket cost-of-living items will make a more enduring dent in inflation than raising interest rates.

If the Reserve Bank does opt for a rate rise, confidence and certainty, two essentials for a healthy economy, will be battered.

All bets may then be off.

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HiddenDragon8:15 pm 27 Oct 23

We are still well short of the “Misery Index” (aggregate of inflation and unemployment) figures which symbolised the grinding stagflation of much of the 1970s and 1980s, but the signs of stagflation are already apparent in the Australian economy.

Anyone who lived through that period and recalls what it was like and, even more to the point, the protracted effort and sacrifice it took to overcome it, will understand that a full-blown repeat is to be avoided – even if that does mean a degree of sacrifice in the short to medium term.

As others have noted, the federal and state/territory (and, indeed, local) governments are making the problem worse through overspending – something they have been doing for many years, under both sides of politics, which is why the degree of restraint now required will be that much harder to sell to Australian voters.

The good news is that it has been done before, and a PM who cheekily claims to have been an economic advisor to the Hawke/Keating government should have first hand insights into the sorts of carefully targeted taxation, welfare and incomes policies which will be required to deal with our economic challenges and ameliorate the worst impacts.

Economists are not betting on a rate rise, they are predicting the RBAs decision based on many of the trends listed below.

The share market, bond and money traders bet on certain outcomes.

It would be a good idea for Ian Bushnell to clarify any personal interest he and his family has in the RBAs decision, so readers have a better understanding of where he stands to benefit or not.

Capital Retro1:53 pm 27 Oct 23

A substantial interest rate increase is a sure bet and it will help reduce inflation by boosting the value of the Australian Dollar which is needed to buy about 90% of our imported consumables including petrol and diesel.

Is the author aware that a lot of us had to pay mortgage interest rates above 15%pa about 30 years ago? We survived and so will the current mortgagors.

“The government is already doing some things to mitigate prices, such as increasing rent assistance and electricity rebates”

If by mitigate, you mean to make it worse then yes, the government is “mitigating” costs such as rent and electricity prices.

Basic, first year economics Ian. The government handing out more money simply increases the capacity within the market to pay increased prices and the market will adjust accordingly, just as it always does.

Think, childcare subsidies… and the cost charged for childcare skyrockets, housing grants… and the cost of housing stock increases to match, private healthcare rebates… and the prices skyrocket. Are you seeing a trend here yet?

All these schemes that utilise tax payer dollars manage to do is make large companies and private investors rich while prolonging and exacerbating the problems they are attempting to “mitigate”.

The end result leads to all this extra money flowing around the economy, it overheats and leads to further inflation, which causes interest rates to rise and causes more pain. Much of the issues that we are currently having with inflation currently are directly caused by Federal and local government spending.

…you might want to stick to whatever your normal area of speciality is, as economics clearly isn’t it.

I don’t bet, but:


The Reserve Bank has a single task of bringing inflation under control, and it has failed to do so for as long as almost a year now. The whole nation suffers as the result.


The real estate interests have effectively hijacked the setting of national economic policy.


Drastic economic measures are needed in order to re-instate Australian national sovereignty. Unless we do so, the nation, especially the middle class, will be plundered and pillaged and we will really become a “banana republic”. The pains of implementing such measures will not be spread evenly across the whole of the society.

The problem is that the federal and local governments are borrowing and spending like drunken sailors which pushes a bunch of additional money into the economy and all but completely offsets the efforts by the reserve bank to remove money from the economy to cool down inflation by increasing rates. The economic illiterates in power are simply making the issue worse and leading to further interest rate rises.

When the local and federal governments are essentially running around lighting fires while the reserve bank desperately tries to put them out, it’s hardly surprising that we end up with this mess.

Grab your popcorn for the next couple of months, it’s going to be a doozy.

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