Prudent stance is vital in tackling cost of living pain
The Reserve Bank’s interest rate rise on Tuesday of 0.5 per centage points, the largest in more than two decades, surprised many. Combined with the pre-election rate increase of 0.25 per centage points, it is the first time Australians have faced successive interest rate rises since 2010. It is probable rates will keep heading north in the short term.
Some people with big mortgages, particularly those who bought at the peak of the property boom in recent months, might face real hardship. But it should not be forgotten that these increases are coming from the historical low cash rate of 0.1 per cent. Even with the two increases, the rate is yet to reach 1 per cent. During the past three decades, more often than not, interest rates ranged from 2 to 5 per cent.
Treasurer Jim Chalmers accepts that inflation will probably continue to increase. Credit:Alex Ellinghausen
Like all economic factors, however, the rate rises must be seen in context. For Treasurer Jim Chalmers, that context is a wide range of economic challenges coming at him all at once, just days after he was sworn in.
Top of the list is, of course, inflation, which is rising faster and higher than first thought. Some economists now believe it could hit 7 per cent by the end of the year, mostly triggered, according to the Reserve Bank, by global factors, including COVID-related disruptions to supply chains and the war in Ukraine. Floods in Australia are, meanwhile, driving up the prices of some produce. The bank is hoping to lift rates just enough to bring inflation back to its preferred 2 to 3 per cent range while not driving the economy into recession. It’s no easy task.
The double whammy on household budgets of inflation and interest rate rises is being exacerbated by the slow rate of wages growth. For workers, wage increases ideally outpace, or at least stay level with inflation, but the recent dramatic increase in prices has not been matched in people’s pay packets, so most workers are expected to experience a cut in real wages this year.
With the federal government having no control over global issues, and the Reserve Bank in charge of interest rates – the most effective lever to reduce demand and tackle inflation – Chalmers has limited economic tools at his disposal. But that does not mean he is without influence.
This week the treasurer said that in the short term, the government would do what it could to alleviate the pressure on households (which will probably translate to very little), but that he expected to offer additional support in his first budget in October. Some measures we already know, because cheaper childcare and medicines were election promises. On energy, the government will have to decide whether to extend the six-month cut in fuel excise, which finishes on September 28. Gas price rises present another challenge with no easy fix.
The Age would encourage the federal government to ask two questions when contemplating cost of living measures: do they improve productivity? Do they alleviate the distress of those most in need? With the national debt expected to top $1 trillion in coming years thanks to COVID spending, any measures must be well justified and not needlessly add to debt while possibly driving the inflation bubble even further.
There is still hope that by the end of the year some of the global forces driving inflation will start to recede. And this week the Reserve Bank also noted that household and business balance sheets were generally in good shape, with household saving rates remaining higher than before the pandemic. Now is the time for prudent, targeted relief, not baking into the budget cost-of-living handouts with little economic dividend.
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