Reserve Bank is treading a narrow, uncertain path after raising interest rates 0.5pc – Michmutters
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Australia

Reserve Bank is treading a narrow, uncertain path after raising interest rates 0.5pc

But Lowe acknowledges the path to achieving the balance between getting inflation down and keeping the economy on an even keel is “clouded in uncertainty” – not least because of global developments.

Markets – globally and in Australia – have recently taken the view, for example, that slowing growth means less need for central banks to raise rates as high or as long as expected in June. Sharemarkets have been lifting again in response. Yet, there are contradictions and risks in every morsel of evidence that inflationary pressures will recede as supply chains recover and interest rates start to bite.

The impact of Russia’s invasion of Ukraine on energy and food prices is just the most brutal model of unexpected shocks that have disrupted the supply of goods and services indefinitely.

From continued COVID-19 lockdowns in China, to floods in northern NSW, to the resilience of the US, the Australian economy is regularly buffeted by the unexpected or the uncontestable.

The RBA can really only target the level of short-term demand in the domestic economy, boosting or suppressing it via the pulley of interest rates.

Just how hard to pull the cord in either direction is less obvious – particularly when it has to cycle along in unofficial tandem with the government’s fiscal speed.

Home owners face budget squeeze

Treasurer Jim Chalmers is more cautious than a prime minister who was criticized for saying the RBA needs to be careful it doesn’t overreach.

Even though Chalmers has announced a review of the bank, he stresses the independence of a Reserve Bank “doing its job”. His own job, he says, is “not to take potshots” at the governor but to do what he can to get the economy growing faster without adding to those inflationary pressures.

That is easy enough for a new treasurer to say, much harder to achieve.

Chalmers is certainly talking tough, including on the need to end the halving of the fuel excise on schedule next month. But his commitment to him to substantial cuts in a budget he describes as “heaving with $1 trillion of Liberal party debt” is much vaguer, while some of the most significant drivers of inflation are far less predictable, let alone controllable by any Australian government .

Delivering on repeated exhortations about the importance of boosting Australia’s flagging productivity has also long remained elusive – with any improvement under Labor’s “economic plan” requiring years at best to show promised results.

Interest rate policy is more immediate – and punitive. The accumulated increase over four months mean those with a mortgage of $500,000 over 25 years must find almost an extra $500 a month.

The squeeze is more than double that for many recent buyers in Sydney and Melbourne who stretched themselves to take out million-dollar-plus mortgages as house prices soared in the last few years. What could possibly go wrong?

Traditional community concerns about Australia’s unaffordable housing, especially for first home buyers, have already switched direction again. Over the three months to June, average dwelling prices dropped by 4.7 per cent in Sydney and 3.2 per cent in Melbourne. Lending for housing reduced by 4.4 per cent in June.

The falls so far are probably only a modest down payment on the prospect of much steeper declines ahead – with all the flow-on effects of the reverse wealth effect on consumer confidence and spending overall.

As befits a phlegmatic central banker, Lowe insists the board is committed to doing what is necessary to ensure inflation in Australia returns to target over time.

The human response is considerably less formulaic than central bank forecasts. Lowe says a key source of uncertainty continues to be the behavior of household spending.

He points to the pressure of higher inflation and higher interest rates on household budgets, with consumer confidence falling along with housing prices in some markets after large increases in recent years.

But he argues that people finding jobs and obtaining more hours of work is working in the other direction, while many households have built up large financial buffers. The banks are also anticipating a lift in wages growth as companies compete for staff in a tight market.

“The board will be paying close attention to how these various factors balance out,” he said.

Yourmove, Australia.

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