tag:theconversation.com,2011:/id/topics/cash-rate-3531/articlesCash rate – The Conversation2023-11-07T05:48:11Ztag:theconversation.com,2011:article/2170942023-11-07T05:48:11Z2023-11-07T05:48:11ZWhy it’s a good bet the Melbourne Cup Day rate hike will be the last<p>Australia just became the odd one out.</p>
<p>At its meeting last week, the <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20231101a.htm">US Federal Reserve</a> kept its official interest rate on hold. A week earlier, the <a href="https://www.ecb.europa.eu/press/pr/date/2023/html/ecb.mp231026%7E6028cea576.en.html">European Central Bank</a> and the <a href="https://www.bankofcanada.ca/core-functions/monetary-policy/key-interest-rate/">Bank of Canada</a> kept their rates on hold, and, at their meetings before that, the <a href="https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2023/september-2023">Bank of England</a> and the <a href="https://www.rbnz.govt.nz/monetary-policy/about-monetary-policy/the-official-cash-rate#">Reserve Bank of New Zealand</a> did the same thing.</p>
<p>Throughout the Western world – with perhaps Australia as the only exception – financial markets have been assuming central banks were done with increasing rates and would soon start <a href="https://www.ft.com/content/c7e712e8-12be-4d25-82e5-e53bd3bb3311">pushing them down</a>.</p>
<p>Reserve Bank Governor Michele Bullock’s <a href="https://www.rba.gov.au/media-releases/2023/mr-23-30.html">statement</a> accompanying Tuesday’s hike in Australia’s cash rate makes it look as if we’re about to join that club. It makes it look as if this hike from 4.1% to 4.35% – a 12-year high – will be the last.</p>
<p>And with good reason. Inflation has been falling almost everywhere, and – notwithstanding the recent uptick associated with higher oil prices – is forecast by the International Monetary Fund to keep falling.</p>
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<h2>The RBA has taken out insurance</h2>
<p>So why did Australia’s Reserve Bank push up rates at all, at a time when none of its global peers were? </p>
<p>The statement makes it look as if it wanted to take out insurance.</p>
<p>While the bank still expects inflation to continue to fall, it says progress now looks “slower than earlier expected”.</p>
<p>Its revised set of forecasts, to be released <a href="https://www.rba.gov.au/publications/">on Friday</a>, still have inflation falling, but to around 3.5% by the end of next year, instead of 3.3%, then to around 3% by the end of 2025 instead of <a href="https://www.rba.gov.au/publications/smp/2023/aug/forecasts.html">2.8%</a>.</p>
<p>The bank is particularly worried that the prices of services – things such as service in a cafe, done by hard-to-find workers – are “continuing to rise briskly”. </p>
<p>And it mentions “uncertainties” four times in eight paragraphs. It isn’t that it thinks inflation won’t keep coming down; it’s that it wants to be <em>sure</em> it is.</p>
<h2>Australian hikes hit harder than in the US</h2>
<p>One argument the bank hasn’t used – and nor should it – is catch-up. The US, the UK, the EU, Canada and New Zealand all have higher official rates than Australia.</p>
<p>But they are all are different to Australia, in an important way.</p>
<p>When the US Federal Reserve pushes up its Federal Funds Rate, nothing much happens to US home borrowers. Here’s why: almost all US home borrowers are on <a href="https://www.rba.gov.au/publications/smp/2023/feb/pdf/box-a-mortgage-interest-payments-in-advanced-economies.pdf">fixed rates</a>, meaning their required mortgage payments don’t increase. </p>
<p>In Australia, only about <a href="https://www.rba.gov.au/publications/bulletin/2023/mar/fixed-rate-housing-loans-monetary-policy-transmission-and-financial-stability-risks.html">one-third</a> of home loans are fixed.</p>
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<a href="https://images.theconversation.com/files/557939/original/file-20231107-17-o2ccma.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Stack of US $100 notes" src="https://images.theconversation.com/files/557939/original/file-20231107-17-o2ccma.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/557939/original/file-20231107-17-o2ccma.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=965&fit=crop&dpr=1 600w, https://images.theconversation.com/files/557939/original/file-20231107-17-o2ccma.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=965&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/557939/original/file-20231107-17-o2ccma.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=965&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/557939/original/file-20231107-17-o2ccma.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1213&fit=crop&dpr=1 754w, https://images.theconversation.com/files/557939/original/file-20231107-17-o2ccma.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1213&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/557939/original/file-20231107-17-o2ccma.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1213&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">In the US, mortgage rates are fixed for up to the life of the loan.</span>
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<p>And US fixed rates are nothing like Australian fixed rates. The <a href="https://www.rba.gov.au/publications/smp/2023/feb/pdf/box-a-mortgage-interest-payments-in-advanced-economies.pdf">typical term</a> in the US is 30 years, rather than the two to three years common in Australia.</p>
<p>This means that, as long as borrowers in the US don’t refinance or move homes, their payments are fixed for the entire term of their loans. Americans never have to pay more just because the Fed jacks up rates. </p>
<p>At least when it comes to homebuyers, the US Fed has to do a good deal more than Australia’s Reserve Bank to have the same effect.</p>
<p>It means the US official rate of 5.25% has less immediate effect on ordinary Americans than Australia’s new rate of 4.35% will have on us.</p>
<p>That’s what the consumer spending figures show. </p>
<p>After a year of high US rates, American consumers are buying 2.9% <a href="https://www.census.gov/retail/sales.html"><em>more</em></a> goods and services than they were a year ago. </p>
<p>After a year of less-high Australian rates, Australian consumers are buying 1.7% <a href="https://www.abs.gov.au/statistics/industry/retail-and-wholesale-trade/retail-trade-australia/sep-2023#"><em>less</em></a>.</p>
<p>This means that, as relatively lightweight as our previous 4.1% cash rate had seemed, it might have been packing more punch than the higher 5.25% rate in the US; and also the higher rates in the UK, Canada and New Zealand, where most of the mortgages are <a href="https://www.rba.gov.au/publications/smp/2023/feb/pdf/box-a-mortgage-interest-payments-in-advanced-economies.pdf">also fixed</a>.</p>
<h2>‘Painful squeeze’</h2>
<p>In her statement, Governor Bullock acknowledged many households were experiencing “<a href="https://www.rba.gov.au/media-releases/2023/mr-23-30.html">a painful squeeze on their finances</a>”. She also noted others were benefiting from rising housing prices, substantial savings buffers and higher interest income. </p>
<p>Bank calculations suggest one in 20 variable-rate borrowers are now going backwards – paying more for essential expenses and housing than they earn. </p>
<p>Among borrowers with big loans relative to their incomes, it’s <a href="https://www.rba.gov.au/speeches/2023/sp-gov-2023-10-24.html">one in four</a>.</p>
<p>There’s nothing in the governor’s statement to suggest she is thinking of pushing up rates again. After today’s hike, the futures market assigned only a <a href="https://www.asx.com.au/markets/trade-our-derivatives-market/futures-market/rba-rate-tracker">30%</a> probability to another hike. </p>
<p>The best guess of people who bet on this for a living is that Australia is about to join the rest of the world and leave rates where they are for quite some time.</p>
<h2>A frugal Christmas, before possible rate drops in 2024</h2>
<p>Alternatively, rates could even begin coming down within 12 months.</p>
<p>The detail of the inflation figures shows monthly inflation surged to 0.8% for one month only, in August, when petrol and diesel prices jumped 9.1%, then fell back to <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/monthly-consumer-price-index-indicator/latest-release#data-downloads">0.3%</a> in September, which is where it was before petrol prices jumped.</p>
<p>It is also looking like prices scarcely increased at all last month. </p>
<p>The Melbourne Institute inflation gauge, which comes out ahead of the Bureau of Statistics gauge and broadly tracks it, fell 0.1% in October. This suggests that, when taken together, price falls (<a href="https://tradingeconomics.com/australia/mi-inflation-gauge-mom">slightly more than</a>) outweighed price increases.</p>
<p>It’s what you would expect if we were tightening our belts, <a href="https://www.abs.gov.au/statistics/industry/retail-and-wholesale-trade/retail-trade-australia/sep-2023#">as we are</a>. </p>
<p>At Big W discount department stories across Australia, sales are down <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02729605-2A1482720?access_token=83ff96335c2d45a094df02a206a39ff4">5.5%</a> on where they were a year ago. </p>
<p>Big W says shoppers have moved away from buying big-ticket items and are instead buying a <a href="https://www.afr.com/chanticleer/woolies-watching-housing-pain-as-cpi-stokes-rate-rise-fears-20231025-p5eez9">remarkable</a> number of small gifts, such as Hot Wheels toy cars. </p>
<p>They sell for $2 each, or five for $9.</p>
<p>It’s pointing to a frugal Christmas in which retailers are going to have to discount if they want to move goods, taking further pressure off inflation.</p>
<p>Should that happen, rates could turn down even sooner than financial market traders expect, perhaps by the middle of next year.</p>
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Read more:
<a href="https://theconversation.com/petrol-is-holding-up-inflation-the-7-graphs-that-show-whats-happening-to-prices-and-what-it-will-mean-for-interest-rates-215888">Petrol is holding up inflation – the 7 graphs that show what's happening to prices and what it will mean for interest rates</a>
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<p class="fine-print"><em><span>Peter Martin is Economics Editor of The Conversation.</span></em></p>It’ll now be a frugal Christmas in many Australian homes. But there is a glimmer of good news: if we do tighten our belts, rates could start to come down by as early as the middle of next year.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2158882023-10-25T04:33:04Z2023-10-25T04:33:04ZPetrol is holding up inflation – the 7 graphs that show what’s happening to prices and what it will mean for interest rates<figure><img src="https://images.theconversation.com/files/555746/original/file-20231025-25-gw57iy.png?ixlib=rb-1.1.0&rect=198%2C754%2C3071%2C1535&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Today’s figures from the Australian Bureau of Statistics show inflation <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/sep-quarter-2023">fell</a> in the September quarter for the third consecutive quarter. </p>
<p>But petrol prices kept it uncomfortably high.</p>
<p>After reaching a 30-year high of 7.8% at the end of 2022, annual inflation as measured by the quarterly index slid to 7% in the March quarter, fell further to 6% in the June quarter and has now slipped to 5.4% in the September quarter.</p>
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<p>These quarterly results are consistent with the more experimental <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/monthly-consumer-price-index-indicator/latest-release">monthly measure</a> which also shows annual inflation trending down since December.</p>
<p>On that measure annual inflation has been broadly falling since December, but has been climbing since it hit a low of 4.9% in July, hitting 5.6% in September largely in response to higher petrol prices and rents.</p>
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<p>Helping bring down inflation in the September quarter were falls in the price of fruit and vegetables. </p>
<p>The bureau said an unusually warm winter improved yields for salad vegetables such as tomatoes, capsicums and lettuce and increased the supply of berries.</p>
<p>But pushing it up were increases in the price of insurance (14.7% over the year to September), healthcare (5.4%) and petrol (7.9%).</p>
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<p>Holding inflation back were three budget measures Treasurer Jim Chalmers said had a combined effect of knocking 0.5 percentage points off inflation:</p>
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<li><p>measured electricity prices increased 4.2% in the September quarter. The bureau said without the rebates announced in the budget, the increase would have been 18.6%</p></li>
<li><p>measured childcare prices fell 13.2% in the quarter. The bureau said without the subsidies introduced in July they would have climbed 6.7%</p></li>
<li><p>measured rent increased 2.2% in the quarter. The bureau said without the increase in rent assistance announced in the May budget the increase would have been 2.5%. </p></li>
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<p>To get a better idea of what would be happening were it not for unusual and outsized moves, the bureau calculates what it calls a trimmed mean measure of “underlying inflation”.</p>
<p>This excludes the 15% of prices that climbed the most in the quarter (notably petrol) and the 15% of prices that climbed the least or fell. Watched closely by the Reserve Bank, it also shows inflation falling, and down to 5.2%.</p>
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<p>The fall in Australia’s inflation since 2022 is in line with falls in other Western nations including the United States, Canada and the United Kingdom. </p>
<p>Each has been brought about by an easing of supply bottlenecks and slowing economic activity in response to higher interest rates, and each has recently stalled in response to higher oil prices.</p>
<p>(In one nation not graphed – China – there has been almost no increase in prices over the past year, resulting in an inflation rate of <a href="https://tradingeconomics.com/china/inflation-cpi">near zero</a>.)</p>
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<p>Global oil prices climbed sharply in July after Saudi Arabia and Russia <a href="https://www.bbc.com/news/business-65804768">decided to cut production</a>, a year and a half after Russia invaded Ukraine, pushing up oil prices in February 2022.</p>
<p>In the words of the new Reserve Bank governor <a href="https://www.rba.gov.au/speeches/2023/sp-gov-2023-10-18-q-and-a-transcript.html">Michele Bullock</a>, the world keeps getting hit with “shock after shock after shock”. </p>
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<p>What happens from here on in Australia will depend not only on the global oil price, which is expressed in US dollars, but also on the US-Australian dollar exchange rate which has fallen 6% since July, pushing up the price of petrol in Australian dollars.</p>
<p>The good news, so far, is that since the end of September (since the period covered by the inflation figures released today) the price of petrol has <a href="https://theconversation.com/50-years-ago-when-the-middle-east-was-at-war-oil-prices-skyrocketed-but-it-probably-wont-happen-this-time-215523">eased</a>.</p>
<p>Where they go from here will largely depend on whether the Israel-Hamas conflict spreads to countries that produce oil.</p>
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<h2>What’s it mean for rates?</h2>
<p>Petrol prices aside, inflationary pressures appear to be easing in Australia. </p>
<p>The interest rate increases engineered by the Reserve Bank have slowed spending and have yet to have their full impact. </p>
<p>Although the decade-long decline in unemployment appears to have <a href="https://www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-force-australia/sep-2023">halted</a> there is no sign of an alarming <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/wage-price-index-australia/latest-release">wages break-out</a>. </p>
<p>In the minutes of its October board meeting the Reserve Bank indicated it would be examining today’s inflation numbers closely when it next meets on Melbourne Cup Day November 7, warning it had </p>
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<p>a low tolerance for a slower return of inflation to target than currently expected. </p>
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<p>In her first speech as governor this week Michele Bullock reiterated that the board would “not hesitate to raise the cash rate further” if there was a material upward revision to the outlook for inflation.</p>
<p>Today, Treasurer Jim Chalmers said the view of his department was that the outlook for inflation had not materially changed.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/no-hike-yet-but-what-happens-on-melbourne-cup-day-depends-on-petrol-214738">No hike yet, but what happens on Melbourne Cup Day depends on petrol</a>
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<p>The Bank will release its revised forecasts on November 10. The last lot, in August, <a href="https://www.rba.gov.au/publications/smp/2023/aug/economic-outlook.html">had inflation dropping</a> from 6% in June to a little over 4% in December. </p>
<p>While today’s result of 5.4% is a little bit above this trajectory, the underlying measure, 5.2% is almost on track. </p>
<p>This means while it may make the board members even more anxious, today’s inflation figure probably hasn’t made another interest rate rise more likely.</p>
<p>Of course, what the board does is up to it. It will decide in a fortnight.</p><img src="https://counter.theconversation.com/content/215888/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Hawkins is a former economic analyst and forecaster in the Reserve Bank and Australian Treasury.</span></em></p>Inflation has slipped from 6% to 5.4%, but the price of petrol climbed 7.2% in the September quarter. Much depends on what the RBA thinks will happen from here on.John Hawkins, Senior Lecturer, Canberra School of Politics, Economics and Society, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2070222023-06-06T07:23:59Z2023-06-06T07:23:59ZWhy RBA Governor Philip Lowe wants to damage the economy further<p>Reserve Bank Governor Philip Lowe and his board have pushed up interest rates yet again – for the twelfth time in 14 months – because they want to damage the economy further.</p>
<p>Home prices have been climbing for <a href="https://www.corelogic.com.au/__data/assets/pdf_file/0029/14978/CoreLogic-HVI-JUN-2023-FINAL.pdf">three straight months</a> – in March, April and May – instead of continuing to fall as they had been since the Reserve Bank of Australia (RBA) began pushing up rates in May 2022, a point the bank <a href="https://www.rba.gov.au/media-releases/2023/mr-23-13.html">notes in its latest statement</a>. </p>
<p>Employment, which in November the RBA predicted would grow <a href="https://www.rba.gov.au/publications/smp/2022/nov/pdf/forecast-table-2022-11.pdf">1.4%</a> this financial year, is instead growing at an annual pace of <a href="https://www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-force-australia/latest-release#">2.9%</a>. In April, Australians worked <a href="https://www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-force-australia/latest-release#">more hours than ever before</a>.</p>
<p>These aren’t signs of a depressed economy, and the Bank wants to depress the economy further to ensure it gets inflation down to where it wants it to be.</p>
<p>The governor’s <a href="https://www.rba.gov.au/monetary-policy/framework/stmt-conduct-mp-7-2016-09-19.html">written agreement</a> with the treasurer requires him to deliver an inflation rate of 2–3% on average, over time.</p>
<h2>Some of us are doing well, most are not</h2>
<p>Parts of the economy are slowing. The statement refers to a “substantial slowing in household spending” (and Wednesday’s <a href="https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-national-income-expenditure-and-product/latest-release">national accounts</a> are likely to be grim) but the RBA’s concern is that the slowdown is uneven.</p>
<p>It says while some households are “experiencing a painful squeeze”, others have “substantial savings buffers”.</p>
<p>Those experiencing the squeeze are the <a href="https://www.abs.gov.au/statistics/people/housing/housing-census/latest-release">35%</a> of households that are mortgaged. The 31% who rent aren’t doing too well either. By contrast, many of the 31% that own outright are doing well indeed.</p>
<p>Since the RBA began pushing up rates in May 2022, the typical interest rate on a new mortgage has doubled – climbing from 2.7% to 5.4%, adding roughly $1,000 per month to the cost of servicing a $600,000 mortgage. The latest decision will add a further $90. And yet home prices are turning back up.</p>
<h2>Lowe wants to be sure</h2>
<p>The RBA has pushed rates to a <a href="https://www.rba.gov.au/statistics/cash-rate/#cash-rate-chart">new ten-year high</a> – and hinted strongly it will push them up again, saying “further tightening” might be required – not because it doesn’t think the economy isn’t slowing overall, but because it wants to make sure it keeps slowing enough to keep inflation heading down.</p>
<p>Inflation was <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release">7%</a> in the year to March, and <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/monthly-consumer-price-index-indicator/latest-release">6.8%</a> in the year to April. The RBA wants to get it down to its forecast of <a href="https://www.rba.gov.au/publications/smp/2023/may/pdf/forecast-table-2023-05.pdf">6.3%</a> for the year to June and to its forecast of 3% two years after that, and while it looks as if things are on track, it isn’t yet sure.</p>
<p>If it has to, it is prepared to push Australia’s unemployment rate up from 3.7% to 4.5% by late next year, putting perhaps an extra 100,000 people out of work. That’s what its <a href="https://www.rba.gov.au/monetary-policy/rba-board-minutes/2023/2023-05-02.html">board minutes</a> predict.</p>
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<span class="caption">Hard to cop. Treasurer Jim Chalmers on Tuesday.</span>
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<p>It’s a decision that Treasurer Jim Chalmers says many Australians will find “<a href="https://www.aph.gov.au/News_and_Events/Watch_Read_Listen/ParlView/video/1230374">difficult to cop</a>”. The RBA’s job, in Chalmers’ words, is to “squash inflation without crunching the economy”.</p>
<p>He could have added that Lowe is running out of time. Unless he gets an extension, his seven-year term as RBA governor ends in September. </p>
<p>That gives him just three more board meetings to make sure inflation is heading back towards the RBA’s target of 2-3% before he hands over to his successor.</p>
<p>Lowe will get the official reading on inflation for the year to June on July 27. If it hasn’t fallen to the 6.3% the RBA expects, he is likely to increase rates again in August.</p>
<h2>Minimum wage untroubling</h2>
<p>Something that doesn’t seem to be giving Lowe much grief is Friday’s
Fair Work Commission national minimum wage decision, trumpeted by the trade union movement as an above-inflation increase of <a href="https://www.australianunions.org.au/campaigns/awr-2023/">8.6%</a>.</p>
<p>What the union movement didn’t say, but Lowe knows well, is that it is an increase hardly anyone will get. The only people who get the misleadingly named national minimum wage are those not already covered by awards, enterprise agreements or individual agreements – at a guess only <a href="https://www.fwc.gov.au/hearings-decisions/major-cases/annual-wage-reviews/annual-wage-review-2022-23/decisions-statements">0.7%</a> of the workforce.</p>
<p>So <a href="https://www.fwc.gov.au/documents/resources/2023fwcfb3500.pdf">hard are these people to find</a> the Commission says it is “difficult to identify in practical terms any occupations or industries” in which they are engaged. </p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/dont-blame-australias-lowest-paid-workers-if-interest-rates-rise-again-206928">Don't blame Australia's lowest-paid workers if interest rates rise again</a>
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<p>What their wage rise will contribute to inflation will be next to nothing. The first part (an increase of 2.7%) changes the award wage they are linked to from what the commission now regards as an inappropriate classification of “C14”, which was originally a metal industry training wage, to “C13”, which is a non-training wage.</p>
<h2>5.75%, but only for some</h2>
<p>The second part of the increase applies to everyone on awards, some 20.5% of the workforce, which probably extends to 25% if you take into account other workers whose pay is linked to awards. It’s an increase of <a href="https://www.fwc.gov.au/documents/resources/2023fwcfb3501.pdf">5.75%</a>, much less than inflation, and on Commission’s calculations should add only 0.6 percentage points to it. </p>
<p>Given that a wage increase of zero wasn’t tenable (even the <a href="https://www.fwc.gov.au/documents/wage-reviews/2022-23/c20231-sub-reply-acci-280423.pdf">employers</a> asked for 3.5%) it means the wage increase a (low-paid) portion of us get in July won’t much impede the Bank’s attempts to bring down inflation.</p>
<p>The Commission believes employers can afford it. It says profits have “generally been healthy” in the private sector industries whose workers most rely on awards, singling out the accommodation, food services and retail industries, which employ one-third of workers on awards and have enjoyed “substantial increases in profits”.</p>
<h2>Expectations are what matters</h2>
<p>The wages of the rest of us who don’t rely on awards are largely determined by bargaining power and what we expect, as are the prices businesses charge, and it is here that the Reserve Bank is worried.</p>
<p>It wants to dent bargaining power by making sure it dents spending and employment, and it wants to make sure above everything else that high inflation doesn’t become entrenched in “expectations”, a point Lowe mentions <a href="https://www.rba.gov.au/media-releases/2023/mr-23-13.html">twice</a> in his eight-paragraph statement.</p>
<p>He says if high inflation does become entrenched in expectations, it will become “very costly to reduce later” requiring even higher interest rates and even higher unemployment.</p><img src="https://counter.theconversation.com/content/207022/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Reserve Bank governor has only three months left in the job and he isn’t yet sure inflation is on the way down.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2032232023-04-04T05:58:56Z2023-04-04T05:58:56ZSure, the RBA froze interest rates this time, but there’s plenty of pain to come<figure><img src="https://images.theconversation.com/files/519182/original/file-20230404-27-nxc9jb.png?ixlib=rb-1.1.0&rect=252%2C11%2C1664%2C945&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Wes Mountain/The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span></figcaption></figure><p>Australia’s Reserve Bank has <a href="https://www.rba.gov.au/media-releases/2023/mr-23-08.html">hit pause</a> on interest rates after ten successive hikes, but for many Australians, the pain it has inflicted is about to begin.</p>
<p>The Bank says more than <a href="https://www.rba.gov.au/publications/bulletin/2023/mar/fixed-rate-housing-loans-monetary-policy-transmission-and-financial-stability-risks.html#fn2">one million</a> households will come off ultra-low fixed-rate mortgages this year and the next, some of those rates fixed for as low as 1.95%. They will be pushed onto loans as high as 5%, meaning that if they borrowed $600,000, instead of paying $2,500 per month they’ll be paying $3,500.</p>
<p>That’s an extra $1,000 those borrowers will need to find each and every month – an extraordinary $250 they will need to find each week. The Bank says 880,000 fixed-rate mortgages will expire this year and another 450,000 next year.</p>
<p>How much harm will that do to the economy? Quite a lot. The Bank said the full effect of its interest rate increases to date was “yet to be felt”.</p>
<h2>Fixed-rate borrowers face trouble</h2>
<p>The Bank’s research finds fixed-rate borrowers are more likely to have larger loans relative to their incomes than other borrowers, and more likely to have high loan-to-valuation ratios, in part because they tend to be more recent borrowers.</p>
<p>Its rule of thumb is that borrowers who spend more than 30% of their income on scheduled payments run the risk of having problems paying. At the moment only one in ten fixed-rate borrowers is in such a situation. When those fixed loans expire and they switch to the higher variable rates, it will be one in four of them.</p>
<p>Which is a good reason for taking stock. The Bank may well increase interest rates again. It <a href="https://www.rba.gov.au/media-releases/2023/mr-23-08.html">said it expected to</a> on Tuesday. But it knows a lot of the damage from what it has already done is yet to come.</p>
<p>After its last meeting in March, the board produced a <a href="https://www.rba.gov.au/monetary-policy/rba-board-minutes/2023/2023-03-07.html">checklist</a> of the things it said it would consider in April in deciding whether to hit pause. On this list were inflation, jobs, retail spending, business conditions and developments overseas.</p>
<h2>Inflation easing</h2>
<p>On <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release">inflation</a>, the board says a range of information suggests the rate has peaked.</p>
<p>The official figures only come out four times a year, and the next ones aren’t due for some weeks. But since the last lot we have had two new readings of the quasi-experimental monthly index, and they have both been <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/monthly-consumer-price-index-indicator/latest-release#">down</a>.</p>
<p>On that monthly measure (which excludes 30% of the items in the quarterly measure, among them gas and electricity) inflation fell from 8.4% in the year to December to 7.4% in the year to January, to 6.8% in the year to February.</p>
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<p>A further indication that price pressures are moderating is what trade unions asked for in the minimum wage case before the Fair Work Commission. They didn’t ask for the official inflation rate of <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release">7.8%</a>, but for <a href="https://www.actu.org.au/actu-media/media-releases/2023/actu-calls-for-7-increase-to-minimum-wages">7%</a>, which suggests they accept the monthly figures and believe inflation is coming down.</p>
<p>On <a href="https://www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-force-australia/latest-release">employment</a> (the second item on the Bank’s checklist), the official figures showed a jump in February after declines in December and January, but the Bank says this is more likely to reflect changing <a href="https://www.rba.gov.au/speeches/2023/sp-gov-2023-03-08.html">seasonal hiring patterns</a> than a genuine surge. Job vacancies have been <a href="https://www.abs.gov.au/statistics/labour/jobs/job-vacancies-australia/latest-release">falling</a> for six months.</p>
<h2>Economy weakening</h2>
<p><a href="https://www.abs.gov.au/statistics/industry/retail-and-wholesale-trade/retail-trade-australia/latest-release">Retail spending</a> (the third item on the checklist) grew just 0.2% in February, much less than price growth of 0.6%, at a time when Australia’s population grew quickly, suggesting what was bought per person went backwards. ANZ <a href="https://d321bl9io865gk.cloudfront.net/view?src=https%3A%2F%2Fanz-singletrack.s3.ap-southeast-2.amazonaws.com%2FANZ_observed_Australian_spending_slows_in_March__1.pdf%3FX-Amz-Algorithm%3DAWS4-HMAC-SHA256%26X-Amz-Credential%3DAKIAZGZPZQBPX2SV22UN%2F20230404%2Fap-southeast-2%2Fs3%2Faws4_request%26X-Amz-Date%3D20230404T000000Z%26X-Amz-Expires%3D86400%26X-Amz-Signature%3Df05f189ae0503b97810a768346a2b14af4056d6d4b6b4a14bb26e381db615d8a%26X-Amz-SignedHeaders%3Dhost&data=aZyemsZ7qURyGrbAVB%2FQrjAI%2BXy%2Fc%2Bw8PFvGZMkPlx787gOXARqm0u3Xc%2FvS4gRFLkzBGCCA0g5QiQsQfPrhgxuLM5UY4Rfcl%2FEGB7JID3dhf4a%2FT0F66qXbTAUjL5pE&referrer=https%3A%2F%2Fpublications.anz.com%2F&namespaced=true&aid=a0N4a000006rwK0EAI&perms=copy-paste;download;print;related-research&perms_sign=sNFVdj7lO0qcGpofkl17NPm3w2urhKhwhx92is3dZRwr9l6Osjn1nsbupR7jb1HXaByw%2F%2F%2F1RAgc%2BPkqb9N8ijYY3AlxJxpC9w%2BL1%2ByB3Zg3wZJd8gJeOmnyGts7fVLSsnYwgtzdVgQk7jKPeP5M06j4cj%2FBdEpO9biNUcAS5GI%3D&timestamp=1680571924&rating_opts=%7B%22ratingValue%22:%220%22,%22ratingType%22:%22star%22%7D">card data</a> for the first two weeks of March shows a further weakening.</p>
<p>The Bank says the combination of higher interest rates, cost-of-living pressures and a decline in housing prices is leading to a “substantial slowing in spending”. While some households have savings buffers, others are experiencing a “painful squeeze on their finances”.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-lowe-road-the-rba-treads-a-narrow-path-199519">The Lowe road – the RBA treads a 'narrow path'</a>
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<p><a href="https://business.nab.com.au/wp-content/uploads/2023/03/NAB-Monthly-Business-Survey-February-2023.pdf">Business conditions</a> (the fourth item of the checklist) remained healthy in February according to the National Australia Bank survey, although confidence slipped into negative territory (meaning pessimists outweighed optimists).</p>
<p>So weak was Australia’s overall economy on the last reading that gross domestic product (spending and income) grew just <a href="https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-national-income-expenditure-and-product/latest-release">0.5%</a> in the three months to December, by about as much as population, meaning GDP per person didn’t grow. </p>
<p>The Bank says it expects “below trend” growth for the next couple of years.</p>
<h2>Overseas headwinds</h2>
<p><a href="https://www.rba.gov.au/">Overseas developments</a> (the last item on the checklist) have been grim since the last board meeting. </p>
<p>The Bank says the international outlook is “subdued” with below-average growth likely in the years ahead, weighed down by bank crises in the <a href="https://theconversation.com/silicon-valley-bank-biggest-us-lender-to-fail-since-2008-financial-crisis-a-finance-expert-explains-the-impact-201626">US</a> and <a href="https://theconversation.com/credit-suisse-is-an-anomaly-why-australia-and-new-zealand-are-safe-from-bank-run-contagion-202126">Switzerland</a>.</p>
<h2>Lowe’s moment of truth</h2>
<p>Governor Philip Lowe will address the <a href="https://www.npc.org.au/speaker/2023/1153-philip-lowe">National Press Club</a> on Wednesday.</p>
<p>It’s likely to be his last chance to explain what he is doing before Treasurer Jim Chalmers releases the report of the <a href="https://rbareview.gov.au/">independent review</a> of the Bank he received in March.</p>
<p>That report is likely to suggest big changes to the organisation of the bank (such as more experts and fewer business figures on the board) and a more open culture. </p>
<p>But in something of a vindication for Lowe, it is set to find little reason to change either the Bank’s <a href="https://www.rba.gov.au/publications/annual-reports/rba/2015/our-charter-core-functions-and-values.html">targets</a> (2–3% inflation and full employment) or the single tool it uses to achieve them, which is adjusting the so-called <a href="https://www.rba.gov.au/education/resources/explainers/the-transmission-of-monetary-policy.html">cash rate</a>.</p>
<p>After Chalmers makes changes as a result of the review, The Bank is likely to continue attempting to do what it is attempting to do now, which is using monthly (or perhaps less frequent) reviews of the cash rate to try to get inflation and employment somewhere near where it wants them. It won’t be easy.</p><img src="https://counter.theconversation.com/content/203223/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>More than one million borrowers are set to come off ultra-low fixed mortgage rates this year and next, meaning the full effect of the ten rate rises to date is yet to be felt.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2012812023-03-07T05:26:24Z2023-03-07T05:26:24ZWhy RBA interest rate hikes could end by September – but brace for at least one more<figure><img src="https://images.theconversation.com/files/513894/original/file-20230307-24-9lwkg2.png?ixlib=rb-1.1.0&rect=448%2C275%2C3543%2C1627&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Lukas Coch/AAP</span></span></figcaption></figure><p>Tuesday’s tenth successive Reserve Bank interest rate hike is the culmination of a process that has added $1,080 to the monthly cost of payments on a $600,000 variable mortgage.</p>
<p>I’ve calculated this increase in payments – which amounts to $12,960 per year – by comparing payments on the National Australia Bank’s base variable mortgage rate before the Reserve Bank started its series of hikes in May 2022 with payments after the NAB lifts its rates in accordance with Tuesday’s decision.</p>
<p>Before the Reserve Bank started hiking in May 2022, the NAB rate was <a href="https://web.archive.org/web/20220419010208/https://www.nab.com.au/personal/home-loans/offers">2.19%</a>. After nine Reserve Bank hikes, ahead of Tuesday’s meeting, it was <a href="https://www.nab.com.au/personal/home-loans/offers">5.24%</a>.</p>
<p>It will soon be <a href="https://www.nab.com.au/personal/home-loans/offers">5.49%</a>, meaning the monthly payment on a 25-year $600,000 NAB base variable mortgage will have climbed from $2,600 to $3,680.</p>
<p>And Tuesday’s <a href="https://www.rba.gov.au/">statement</a> from the Reserve Bank indicates there’s more to come.</p>
<p>But an end to these rate rises is within sight – possibly as soon as mid-September.</p>
<h2>Bank on at least 1 more rate rise</h2>
<p>The best guide to what the Reserve Bank has in mind is usually the first few words of the <a href="https://www.rba.gov.au/media-releases/2023/mr-23-07.html">final paragraph</a> of its statement.</p>
<p>Last time, in February, those words referred to further interest rate “<a href="https://theconversation.com/rba-warns-of-at-least-2-more-interest-rate-rises-in-coming-months-as-the-economic-outlook-worsens-199272">increases</a>”, making it clear the bank expected more than one.</p>
<p>This time, there’s no plural. The sentence refers merely to “further tightening”, which could mean as little as one more increase, and not necessarily next month.</p>
<p>The statement, like the last, says rate hikes work “with a lag, and that the full effect of the cumulative increase in interest rates is yet to be felt in mortgage payments”. That’s a reference to the large number of borrowers who are about to be hit with higher payments as they come off low fixed rates.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-lowe-road-the-rba-treads-a-narrow-path-199519">The Lowe road – the RBA treads a 'narrow path'</a>
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<p>And, unlike the last statement, this one says inflation may have peaked.</p>
<p>So there are reasons for easing off, but also – as I’ll explain shortly – important institutional forces propelling Governor Philip Lowe to keep going.</p>
<h2>Reasons for easing off on further rate hikes</h2>
<p>The whole point of the dramatic interest rate hikes has been to make sure Australia’s sudden reemergence of high inflation is <a href="https://www.rba.gov.au/speeches/2023/sp-gov-2023-02-17.html">only temporary</a>.</p>
<p>Inflation hit <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release">7.8%</a> in December, well outside the Reserve Bank’s 2-3% target zone and the most since 1990.</p>
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<p>The good news is to the extent that inflation comes from overseas in the prices for fuel and other imports, it seems to be easing. </p>
<p>US inflation has been falling for seven months now, from a high of 9.1% in June to <a href="https://tradingeconomics.com/united-states/inflation-cpi">6.4%</a> in January. UK inflation has been falling for three months, from 10.1% to <a href="https://tradingeconomics.com/united-kingdom/inflation-cpi">9.1%</a>.</p>
<p>To the extent that inflation is driven by a surge in spending at home, that surge has stopped. Retail spending has been <a href="https://www.abs.gov.au/statistics/industry/retail-and-wholesale-trade/retail-trade-australia/latest-release#total-retail-turnover">flat</a> (unchanged) for four months notwithstanding a growing population and growing prices. </p>
<h2>We’re winding back spending</h2>
<p>This means what’s bought per person is falling, as would be expected if we were tightening our belts in response to higher interest rates and higher prices.</p>
<p>In February consumer confidence, as measured by Westpac and the Melbourne Institute, dived to its <a href="https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/economics-research/er20230214BullConsumerSentiment.pdf">lowest point</a> since the 2020 COVID recession.</p>
<p>Asked whether now was a good time to buy a major household item, only 17% of Australians surveyed said yes. Twice as many – 39% – said no.</p>
<p>Last week’s national accounts showed gross domestic product, the official measure of everything earned, bought and sold in the economy, climbing only <a href="https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-national-income-expenditure-and-product/latest-release">0.5%</a> in the three months to December.</p>
<p>But buried in the fine print was something worse. Were it not for a <em>fall</em> in imports in the December quarter, GDP would have gone backwards. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/rbas-latest-forecasts-are-grim-here-are-5-reasons-why-199509">RBA's latest forecasts are grim. Here are 5 reasons why</a>
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<p>It is one of the truly bizarre mathematical oddities of the way the GDP is calculated that a fall in imports boosts measured GDP, even though it is a sign we are tightening our belts.</p>
<p>And we’ve been having to tighten our belts. Wage figures released since February’s board meeting show growth of just <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/wage-price-in">3.3%</a> in the year to December, way below the increase in prices, and way below the entrenched growth of 5% the governor has said <a href="https://parlinfo.aph.gov.au/parlInfo/download/committees/commrep/26560/toc_pdf/Economics%20Committee_2023_02_17.pdf">would concern him</a>.</p>
<p>One of the reasons wages aren’t yet climbing particularly fast is that (unusually) wage earners expect inflation to fall. Throughout most of its life, the Melbourne Institute survey of <a href="https://melbourneinstitute.unimelb.edu.au/publications/macroeconomic-reports/latest-news/survey-of-consumer-inflationary-and-wage-expectations">inflation expectations</a> has pointed to higher inflation than was actually experienced. At the moment it is pointing to lower inflation.</p>
<p>Nevertheless, the RBA board “remains alert to the risk of a prices-wages spiral” according to Tuesday’s statement. This implies it isn’t yet reassured by the official figures and that its <a href="https://www.rba.gov.au/publications/podcast/#">liaison program</a> with 600 or so business operators has identified increases yet to come.</p>
<h2>6 months left to leave a legacy</h2>
<p>That’s the economics, which points to taking things gently on rate rises from here on. But as I mentioned, there’s something else at play that might propel Governor Lowe to keep going a little further.</p>
<p>Governor Lowe’s five-year term expires on September 17. As his predecessor did, he would like to hand over the bank in good order.</p>
<p>That means having clearly broken the back of runaway inflation. It might mean going harder for longer on interest rate rises than he otherwise would to get things in order. It’s what his predecessor did for him in August 2016. </p>
<p>Glenn Stevens cut interest rates one last time before he left office to make sure Lowe didn’t take over the bank having to do it himself. Lowe left rates unchanged for almost three years. He had been handed the keys to a car in working order.</p>
<p>Seen this way, Lowe’s determination to be sure inflation is on the way down before leaving office is a matter of etiquette. He has six months left to get his house in order.</p>
<p>It’s a consideration that might mean more mortgage rate pain than would have been the case had Lowe not been near the end of his term.</p><img src="https://counter.theconversation.com/content/201281/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Reserve Bank’s statement indicates there aren’t too many rate rises left. History suggests those hikes could come to an end by early spring.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1992722023-02-07T05:57:27Z2023-02-07T05:57:27ZRBA warns of at least 2 more interest rate rises in coming months, as the economic outlook worsens<figure><img src="https://images.theconversation.com/files/508187/original/file-20230205-30-k22ij8.png?ixlib=rb-1.1.0&rect=1152%2C519%2C2382%2C1432&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Reserve Bank Governor Philip Lowe.</span> <span class="attribution"><span class="source">Lukas Coch/AAP</span></span></figcaption></figure><p>Australia’s cash rate has hit 3.35%, after the Reserve Bank raised interest rates for the ninth time in a row – and signalled more interest rate pain ahead. The 0.25 percentage point rise adds A$90 a month to a $600,000 variable mortgage.</p>
<p>Ahead of Tuesday’s <a href="https://www.rba.gov.au/media-releases/2023/mr-23-04.html">statement</a> from the Reserve Bank board, there was talk of just one more 0.25 point rate hike this year. </p>
<p>That was the view of traders in the money market, who had priced loans on the basis that the bank’s <a href="https://www.rba.gov.au/statistics/cash-rate/">cash rate</a> would climb just 0.35 points further after being lifted to 3.35% on Tuesday, before <a href="https://cdn.theconversation.com/static_files/files/2526/Feb62023ib_expectation_curve_graph.pdf">plateauing and then falling</a>.</p>
<p>No longer. The statement released after Tuesday’s board meeting included this carefully-considered plural:</p>
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<p>The Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary.</p>
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<p>The reference was to “increases”, not an “increase”, and to those increases in the months ahead, implying (at least) two more increases within months.</p>
<p>Within minutes, traders adjusted their prices to a peak in the cash rate of <a href="https://images.theconversation.com/files/508804/original/file-20230208-24-31aufw.gif">3.9%</a>, rather than 3.7% – which coincidentally was around the average forecast of participants in The Conversation’s <a href="https://theconversation.com/higher-interest-rates-falling-home-prices-and-real-wages-but-no-recession-top-economists-forecasts-for-2023-198975">economic survey</a> at the start of the week.</p>
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Read more:
<a href="https://theconversation.com/higher-interest-rates-falling-home-prices-and-real-wages-but-no-recession-top-economists-forecasts-for-2023-198975">Higher interest rates, falling home prices and real wages, but no recession: top economists' forecasts for 2023</a>
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<p>The bank is lifting rates even though it thinks inflation is heading down. </p>
<p>In a preview of its full set of forecasts to be released on Friday, it said it expected inflation to slide from its present 7.8% to <a href="https://www.rba.gov.au/media-releases/2023/mr-23-04.html">4.74%</a> by the end of this year, and to around 3% by mid-2025, which is also in line with the forecasts of the Conversation’s panel.</p>
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<p>The steam is coming out of inflation partly because of interest rate hikes here and overseas, and partly because the global effects of Russia’s invasion of Ukraine are fading.</p>
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<span class="caption">US Federal Reserve Chair Jerome Powell.</span>
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<p>Last Wednesday, the head of the US Federal Reserve Jerome Powell (the equivalent of Australia’s Reserve Bank Governor Philip Lowe) began talking about “disinflation”.</p>
<p>“We can now say, I think for the first time, that the disinflationary process has started,” he told a press conference, and to underline the point he used the word “<a href="https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20230201.pdf">disinflation</a>” ten more times in 44 minutes.</p>
<p>US inflation has been falling since the middle of last year, from a peak of 9.1% in June to <a href="https://tradingeconomics.com/united-states/inflation-cpi">6.5%</a> in December.</p>
<p>Powell says inflation is falling mainly because the global shortages of goods and commodities caused by Russia’s invasion of Ukraine have been “fixed”. </p>
<p>But inflation is also falling because of the work Powell has done. In the US, the Federal Funds rate (similar to our Reserve Bank cash rate) has climbed from something near zero to 4.5% in the space of a year, denting consumer spending. </p>
<h2>Disinflation abroad, weak wage pressure at home</h2>
<p>In Australia, figures released by the Bureau of Statistics on Monday show spending <a href="https://www.abs.gov.au/statistics/industry/retail-and-wholesale-trade/retail-trade-australia/dec-2022">fell</a> in the three months to December – not in absolute dollar terms, because December is always a big month, but compared to what would have been expected given the end of the year.</p>
<p>Continuing to hold up inflation in the US and in the UK – but not in Australia – has been very high wages growth. Higher prices have become baked into higher wages, which have been fed into higher prices, which have in turn fed back into higher wages.</p>
<p>Not here. Whereas in the US and the UK wage growth has topped 6%, here it is officially <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/wage-price-index-australia/latest-releas">3.1%</a> – way below what would be needed to hold up inflation.</p>
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Read more:
<a href="https://theconversation.com/zombie-wage-deals-have-hurt-australians-for-years-heres-how-new-industrial-relations-laws-could-finally-end-your-wage-pain-195534">'Zombie' wage deals have hurt Australians for years. Here's how new industrial relations laws could finally end your wage pain</a>
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<p>In part, we’ve a former Labor government to thank for the absence of a wage-price spiral. </p>
<p>Prime Minister Paul Keating steered Australia toward <a href="https://theconversation.com/zombie-wage-deals-have-hurt-australians-for-years-heres-how-new-industrial-relations-laws-could-finally-end-your-wage-pain-195534">enterprise bargaining</a> at the start of the 1990s, locking many of us into wage agreements that are only struck once every three or so years, and are unable to respond quickly to prices.</p>
<p>So why is the Reserve Bank determined to whack inflation further, rather than watch it slowly die?</p>
<p>Perhaps to send a message that it is really, really serious, and that it is not a good idea to get relaxed about spending, thinking the worst will soon be over.</p>
<h2>Bleak times ahead</h2>
<p>Between the lines though, the bank is hinting it’s likely to soon ease off. </p>
<p>Its statement says rate increases affect the economy “with a lag” and that Australians on fixed-rate mortgages have yet to feel the full effect of the cumulative increases since May.</p>
<p>The bank’s assessment of the economy after the increases are over is bleak. </p>
<p>It says it expects GDP growth to slow to only 1.5% during 2023 and 2024, which is an even more dismal forecast than the International Monetary Fund’s, which has economic growth of just 1.6% this year, climbing to a historically-low 2.2% by 2026. The Conversation’s forecasters expect 1.7%, climbing to 2.5%. </p>
<p>The RBA’s forecast would mean income per person <a href="https://cdn.theconversation.com/static_files/files/2524/IMF_Main_Australian_forecasts.pdf">barely increases</a> for years to come (although the unemployment rate would stay below 5%), a condition that before COVID was known as <a href="https://corporatefinanceinstitute.com/resources/economics/secular-stagnation/">secular stagnation</a>. </p>
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Read more:
<a href="https://theconversation.com/politics-with-michelle-grattan-treasurer-jim-chalmers-answers-critics-of-his-values-based-capitalism-198790">Politics with Michelle Grattan: Treasurer Jim Chalmers answers critics of his 'values-based capitalism'</a>
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<p>This would mean the economic resources Australian governments needs to provide the services we’re likely to need (such as to get to net zero emissions, and to deal with climate change) are going to be harder to come by.</p>
<p>It’s what Treasurer Jim Chalmers intends to spend much of 2023 readying us for. </p>
<p>Later this month Chalmers will release a revamped <a href="https://ministers.treasury.gov.au/ministers/jim-chalmers-2022/speeches/address-chifley-research-centre-conference-national-press-club">tax expenditures statement</a>, setting out the scope to wind back tax breaks, including those for profits made selling high-end family homes. That’s something Chalmers says he <a href="https://ministers.treasury.gov.au/ministers/jim-chalmers-2022/transcripts/press-conference-melbourne">isn’t considering</a>, but which the <a href="https://www.imf.org/en/Publications/CR/Issues/2023/01/26/Australia-2022-Article-IV-Consultation-Press-Release-and-Staff-Report-528629">IMF</a> has recommended.</p>
<p>And then later in the year, he will release the first <a href="https://treasury.gov.au/intergenerational-report">intergenerational report</a> to properly spell out the financial costs of climate change – right through to 2063. </p>
<p>2023 is going to be quite a year.</p><img src="https://counter.theconversation.com/content/199272/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Reserve Bank has signalled it will keep pushing up rates until it has reigned in inflation – even if this means weaker economic growth, with income per person barely growing for years to come.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1989752023-02-05T03:08:42Z2023-02-05T03:08:42ZHigher interest rates, falling home prices and real wages, but no recession: top economists’ forecasts for 2023<figure><img src="https://images.theconversation.com/files/508174/original/file-20230205-13-n69h0m.png?ixlib=rb-1.1.0&rect=317%2C0%2C3676%2C1982&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Wes Mountain/The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span></figcaption></figure><p>Australia’s Reserve Bank is set to push up rates once again at its first meeting for the year on Tuesday, according to <a href="https://cdn.theconversation.com/static_files/files/2528/2023CONVERSATIONFORECASTING_SURVEYResponses.pdf">all but two</a> of the 29 leading economists surveyed by The Conversation at the start of 2023. </p>
<p>Those experts predict we will still be living with higher rates by the end of the year, although they should start to come down in 2024.</p>
<p>Their average forecast is an increase in the bank’s <a href="https://www.rba.gov.au/statistics/cash-rate/">cash rate target</a> from 3.1% to 3.6% during 2023. That’s enough to add an extra A$190 to the monthly cost of servicing a $600,000 variable mortgage, bringing the total increase in the cost of servicing such a mortgage since the bank began hiking rates in May 2022 to more than $1,000.</p>
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<p>All but three of the specialists surveyed expect the Reserve Bank’s cash rate target to peak during 2023, and on average the panel expects it to fall back to close to its present level during 2024.</p>
<p>Panelist Jo Masters of Barrenjoey Capital says the bank’s keenness to bring down inflation will be tempered by the knowledge that a large number of borrowers are set to exit the very cheap three-year fixed-rate loans they took out early in the pandemic and are facing very steep increases indeed.</p>
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<p>The highest forecast for a peak in the cash rate is from former Reserve Bank research manager Peter Tulip, who expects a cash rate of 5% by December 2024 – enough to add a further $725 to the monthly cost of servicing a $600,000 mortgage.</p>
<p>The panel assembled by The Conversation includes macroeconomists, economic modellers, former Treasury, International Monetary Fund and financial market economists, and a former member of the Reserve Bank board. </p>
<p>Most expect inflation to fall sharply from here on, with all but five believing the quarterly rate will turn out to have peaked at 7.8% in <a href="https://theconversation.com/with-inflation-still-rising-the-rba-will-almost-certainly-lift-interest-rates-in-february-198504">December 2022</a>.</p>
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<p>Financial markets economist Warren Hogan says the food and fuel prices pushed up by Russia’s invasion of Ukraine are already falling, and the only question is how quickly inflation falls, and how soon it returns to the Reserve Bank’s <a href="https://www.rba.gov.au/inflation/inflation-target.html">2-3%</a> target band.</p>
<p>Former federal Labor minister Craig Emerson says, unlike in the 1970s, wage rises aren’t helping sustain inflation. Then, more than half the Australian workforce was unionised and wage setting was centralised. Today only <a href="https://www.abs.gov.au/statistics/labour/earnings-and-working-conditions/trade-union-membership/latest-release">one-eighth</a> of the workforce is unionised and most wages are not set centrally.</p>
<p>The panel expects real wages to go backwards for the third consecutive year in 2023, as wages growth of 3.9% is overpowered by prices growth of 4.5%.</p>
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<p>Wage growth is expected to fall back to 3.6% in 2024 as the economy weakens and as an increase in immigration helps fill labour shortages. But the average forecast is wage growth to outstrip price rises next year for the first time since 2020, as inflation falls back to 3.2%.</p>
<h2>Recession unlikely at home, more likely abroad</h2>
<p>The panel assigns a 26% probability to a <a href="https://www.rba.gov.au/education/resources/explainers/recession.html">recession</a> in the next two years, an increase on the <a href="https://theconversation.com/sky-high-mortgages-7-1-inflation-and-a-20-chance-of-recession-how-the-conversations-panel-sees-the-year-ahead-185411">20%</a> it assigned in mid-2022.</p>
<p>Former Department of Foreign Affairs and Trade chief economist Jenny Gordon says if Europe goes into a recession in its 2023-24 winter and China’s recovery is slow, a recession in Australia will become more likely.</p>
<p>While the panel expects China’s decision to end COVID lockdowns will lift its growth rate from 3% in 2022 to 4.7% in 2023, it does not expect anything like a return to the previous growth rates of 8% or more. </p>
<p>Industry economist Julie Toth says China is facing resource depletion and <a href="https://theconversation.com/chinas-population-is-now-inexorably-shrinking-bringing-forward-the-day-the-planets-population-turns-down-198061">population decline</a>, as well as a cyclical downturn in industrial and residential investment. COVID-19 presents an immediate threat to its people and economy.</p>
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Read more:
<a href="https://theconversation.com/chinas-population-is-now-inexorably-shrinking-bringing-forward-the-day-the-planets-population-turns-down-198061">China's population is now inexorably shrinking, bringing forward the day the planet's population turns down</a>
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<p>The panel assigns a 42% probability to a recession in the United States within the next two years, a 57% probability to a recession in the European Union, and a 73% probability to a recession in the United Kingdom.</p>
<p>Four of the economists surveyed believe the UK recession has already started. As in the US, it is likely to result from the run of interest rate increases put in place to contain inflation. </p>
<p>University of Tasmania economist Mala Raghavan expects the US to skirt an outright recession and instead experience a “rolling recession”, in which different parts of the economy take time to turn down.</p>
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<p>KPMG forecaster Sarah Hunter says while Australia should avoid a recession as commonly described (two consecutive quarters in which production shrinks) economic growth could well turn negative for one quarter at the start of the year, as household spending turns down and mining shipments are disrupted by floods.</p>
<p>Regardless, the economy will be “very weak by historic standards” in 2023. The panel expects economic growth of only 1.7% in 2023, climbing to 2.5% by 2026.</p>
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<p>The panel is forecasting very weak growth in household spending of <a href="https://cdn.theconversation.com/static_files/files/2528/2023CONVERSATIONFORECASTING_SURVEYResponses.pdf">2.2%</a> over the year to December, and a further decline in the household saving ratio from 6.9 to 5.1%.</p>
<p>Non-mining business investment is expected to hold up, climbing 2.8% over the year to December, up from 1.75%. Mining investment is expected to climb 3.4%, with much depending on demand from the rest of the world.</p>
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Read more:
<a href="https://theconversation.com/how-housing-made-rich-australians-50-richer-leaving-renters-and-the-young-behind-and-how-to-fix-it-195189">How housing made rich Australians 50% richer, leaving renters and the young behind – and how to fix it</a>
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<p>Home prices are expected to fall further in 2023 in response to higher interest rates, slipping another 7% in Sydney and 6% in Melbourne. </p>
<p>AMP economist Shane Oliver says the buying power of someone on average full-time earnings with a 20% deposit has fallen by more than one quarter as a result of interest rate hikes, and prices are yet to fully reflect this.</p>
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<h2>Jobs to hold up</h2>
<p>Australia’s unemployment rate dipped below 4% for the first time in five decades in 2022. It is expected to stay below 4% (at 3.96%) in 2023 and then remain below 5% in 2024 even as immigration builds up, in part because low unemployment has made <a href="https://theconversation.com/why-unemployment-is-set-to-stay-below-5-for-years-to-come-188705">previously unemployed Australians employable</a>.</p>
<p>As former Deloitte Access director Chris Richardson puts it, previously hard to employ Australians have been “polishing their skills and their resumes”.</p>
<p>Federation University economist Margaret McKenzie also points to the large amount of <a href="https://theconversation.com/an-extra-60-600-australians-found-work-in-may-heres-why-wages-arent-moving-much-184929">sick leave</a> being taken, creating demand for workers to fill the gaps.</p>
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<p>On average, the panel is expecting a flat share market in the year ahead, but the forecasts range from growth of 8% to a decline of 17%, led down by weaker bank stocks and household spending as interest rate increases bite. </p>
<p>The panel expects the iron ore price to remain roughly steady at US$105 throughout 2023, rather than falling to the US$55 assumed in the budget.</p>
<p>Partly as a result, the panel is forecasting a budget deficit of <a href="https://cdn.theconversation.com/static_files/files/2528/2023CONVERSATIONFORECASTING_SURVEYResponses.pdf">A$29.4 billion</a> in 2022-23, down from the officially forecast $36.9 billion.</p>
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<h2>The Conversation’s Economic Panel</h2>
<p><em>Click on economist to see full profile.</em></p>
<p><iframe id="tc-infographic-806" class="tc-infographic" height="400px" src="https://cdn.theconversation.com/infographics/806/c4eb69d660b32197eb65fea16a3be211fb79bc6b/site/index.html" width="100%" style="border: none" frameborder="0"></iframe></p>
<p><strong><a href="https://cdn.theconversation.com/static_files/files/2528/2023CONVERSATIONFORECASTING_SURVEYResponses.pdf">Download the 2023 economic survey</a></strong></p><img src="https://counter.theconversation.com/content/198975/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Conversation’s 29-member panel expects very weak economic growth and recessions in much of the rest of the world, but there’s good news down the track for Australians’ buying power.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1959362022-12-06T05:24:59Z2022-12-06T05:24:59ZThis latest increase in RBA interest rates might well be the last, for some time<figure><img src="https://images.theconversation.com/files/499177/original/file-20221206-19601-800hvm.png?ixlib=rb-1.1.0&rect=826%2C712%2C3167%2C1556&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>You might not know it from reading Tuesday’s statement announcing Australia’s eighth consecutive increase in interest rates, but our Reserve Bank might finally have done enough.</p>
<p>The statement says inflation is still “<a href="https://www.rba.gov.au/media-releases/2022/mr-22-41.html">too high</a>” and that the bank expects to increase rates further, although it is “not on a pre-set course”.</p>
<p>But, as it happens, the bank is unlikely to increase rates again for a further two months. The board doesn’t meet in January, meaning the nine weeks between now and its first meeting for 2023 on February 7 will provide an unusually long time for reflection – the first after eight relentless months of hikes.</p>
<p>From time to time, Reserve Bank officials talk about the idea of a “pause”. AMP chief economist Shane Oliver has counted the number of occasions they have referred to the prospect of a “pause” in public pronouncements in the past month. He has counted six.</p>
<h2>Inflation to hit 8%, while weakening</h2>
<p>Although the annual inflation figure for the year to December due on January 25 is expected to be high – the bank is expecting <a href="https://www.rba.gov.au/media-releases/2022/mr-22-41.html">8%</a> – the quarter-to-quarter result is likely to show inflation weakening.</p>
<p>The Bureau of Statistics releases the <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release">quarterly inflation figures</a> only once every three months. But for some time now it has also been calculating inflation <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/monthly-consumer-price-index-indicator/latest-release">monthly</a>, using a smaller survey that seems to give a pretty good indication of what the larger survey is about to show.</p>
<p>Oliver has graphed what the smaller survey has been saying each month about inflation over the previous three months alongside what the larger quarterly survey has been saying. The two line up, except that in recent months the monthly measure has been sliding.</p>
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<p>This suggests that the official quarterly figure released in January will be weak.</p>
<p>Oliver concedes that the new monthly measure needs to be interpreted with caution, partly because it excludes 30% of the items included in the official quarterly measure, among them gas and electricity. But he says if 70% of the quarterly measure is cooling down, “that has to be a positive sign”.</p>
<p>Globally, oil prices and wheat prices and the prices of other things affected by Russia’s invasion of Ukraine are down <a href="https://markets.businessinsider.com/commodities/wheat-price/usd?op=1">one-quarter</a> to <a href="https://tradingeconomics.com/commodity/crude-oil">one-third</a> from their peaks in the middle of the year, undoing much of what has been driving inflation.</p>
<h2>The US is considering moderation</h2>
<p>In the United States, where inflation peaked at <a href="https://tradingeconomics.com/united-states/inflation-cpi">9.1%</a> in June and has since slid to 7.7%, the head of the Federal Reserve Jerome Powell has begun talking about “<a href="https://www.federalreserve.gov/newsevents/speech/powell20221130a.htm">moderating the pace of rate increases</a>” saying given all he has done, he mightn’t need to raise rates much further to tame inflation.</p>
<p>Australia’s Reserve Bank has already moderated the size of its increases, cutting each one from 0.5 percentage points per month to 0.25 points in September. </p>
<p>If it merely wants to get inflation down (as it says it does) and not needlessly damage the economy along the way, there’s a good case for leaving rates steady at its first meeting for the year in February, and then waiting until sees the full impact of what it has done so far.</p>
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<strong>
Read more:
<a href="https://theconversation.com/global-recession-is-increasingly-likely-heres-how-australia-could-escape-191336">Global recession is increasingly likely. Here's how Australia could escape</a>
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<p>Australia’s eight rate rises to date are set to push up the cost of payments on a typical $600,000 variable mortgage by a total of $1,000 per month.</p>
<p>The bank said in October that although most borrowers should be able to weather that increased financial pressure for some time, many would “need to curtail their consumption and some could <a href="https://www.rba.gov.au/publications/fsr/2022/oct/pdf/box-b-the-impact-of-rising-interest-rates-and-inflation-on-indebted-households-cash-flows.pdf">ultimately see their savings buffers exhausted</a>”.</p>
<p>If these households have limited ability to make adjustments to their financial situation (such as by increasing their hours worked) they could fall into arrears and “may eventually need to sell their homes or may even enter into foreclosure”. </p>
<p>For fixed-rate borrowers, things are worse. About one-third of mortgages are on fixed rates, and about two-thirds of them are <a href="https://www.rba.gov.au/publications/fsr/2022/oct/pdf/02-household-business-finances-in-australia.pdf">due to expire next year</a>. Many were taken out at fixed rates of around 2%. Depending on how high the Reserve Bank pushes things, those borrowers will suddenly find themselves paying 6-7%.</p>
<h2>We’re tightening our belts</h2>
<p>Spending plans are already crumbling. Asked whether now is a “good time to buy a major household item” in the Westpac-Melbourne Institute November confidence survey, consumers’ answers were about as dismal as they have ever been. Around <a href="https://library.westpaciq.com.au/content/dam/public/westpaciq/secure/economics/documents/aus/2022/11/er20221108BullConsumerSentiment.pdf">40%</a> said they planned to spend less on gifts this year than the year before – the highest proportion since the question was first asked in 2009. </p>
<p>Wednesday’s national accounts will show company profits fell by a seasonally adjusted <a href="https://www.abs.gov.au/statistics/economy/business-indicators/business-indicators-australia/sep-2022">12.4%</a> in the three months to September, led down by profits in retail (-6%), manufacturing (-21%) and finance (-43%). Accommodation (up 64% after years in which it was hard to travel) is the only big exception.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/in-defence-of-rba-governor-lowe-an-easy-scapegoat-for-rates-194037">In defence of RBA Governor Lowe: an easy scapegoat for rates</a>
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<p>Quarterly economic growth is expected to be weak, although the annual figure will look good because things were worse during the lockdowns a year before.</p>
<p>The national accounts will also show a jump in wage payments of <a href="https://www.abs.gov.au/statistics/economy/business-indicators/business-indicators-australia/sep-2022">2.9%</a> over the quarter, and 11% over the year – which sounds high, but much of it will be because of the extra 690,000 people employed. Pay per worker will have climbed 4.7%.</p>
<p>A good reading of Wednesday’s national accounts will be that eight consecutive increases in mortgage rates are starting to bite into household budgets in exactly the way the Reserve Bank wants, and that there’s a chance they’ll bite too hard.</p>
<p>On February 7 the board might feel entitled to take the view that it might have done enough, and hold off for a while while it waits to see how things play out.</p><img src="https://counter.theconversation.com/content/195936/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The full effects of the eight consecutive increases in the Reserve Bank’s cash rate are yet to become apparent, and there are signs inflation is on the way down.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1880112022-08-02T05:47:28Z2022-08-02T05:47:28ZThe RBA is hiking rates because it’s scared it can’t contain inflation<figure><img src="https://images.theconversation.com/files/477090/original/file-20220802-25-kkgr6h.png?ixlib=rb-1.1.0&rect=1407%2C898%2C2299%2C1263&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>There are signs inflation pressures are easing. Oil prices are down almost 20% on their peak in March. They’ve been falling consistently <a href="https://images.theconversation.com/files/477021/original/file-20220801-70473-3lxs57.JPG">for a month</a>. </p>
<p>The average capital city unleaded price is down from A$2.11 per litre in early July to a more bearable <a href="https://aip.com.au/pricing/ULP/National/5-Capital-City-Average">$1.74</a>. </p>
<p>The money market is pricing in much lower inflation than we presently have over the next <a href="https://www.datawrapper.de/_/mToSH/">one to four years</a>, and consumers’ inflation expectations (although still high at 6.3%) <a href="https://melbourneinstitute.unimelb.edu.au/publications/macroeconomic-reports/latest-news/survey-of-consumer-inflationary-and-wage-expectations">eased off a bit</a> between June and July.</p>
<p>So why did the Reserve Bank just hike its cash rate by an outsized 0.50 percentage points for the <a href="https://www.rba.gov.au/media-releases/2022/mr-22-21.html">third consecutive month</a>, taking it to 1.85%?</p>
<p>Partly because it knows what is to come.</p>
<h2>Higher inflation in store</h2>
<p>The 6.1% inflation figure released last week was for the year leading to the quarter that ended in <a href="https://theconversation.com/inflation-hasnt-been-higher-for-32-years-what-now-187452">June</a>. Since then, in July, we’ve been hit by massive electricity price increases, <a href="https://www.smh.com.au/business/companies/australians-face-paying-hundreds-more-in-power-bills-as-suppliers-pass-on-rises-20220705-p5azbd.html">some as high as 19%</a>, and gas prices that have manufacturers <a href="https://www.afr.com/policy/energy-and-climate/fresh-surge-in-gas-prices-alarms-manufacturers-20210706-p587b4">screaming</a>.</p>
<p>The monthly inflation gauge compiled by the Melbourne Institute (the Bureau of Statistics hasn’t yet gone monthly) kicked up <a href="https://www.afr.com/policy/economy/july-inflation-gauge-chalks-up-20-year-record-20220801-p5b66t">2.1%</a> in July, the biggest monthly jump in two decades.</p>
<p>And there’s something else. </p>
<p>The Reserve Bank’s deepest fear might be that it can’t contain inflation, and that its apparent success over three decades has owed a lot to luck.</p>
<h2>Reserve banks blessed by luck</h2>
<p>Inflation fell to low levels throughout the world around the world at about the time it fell to low levels in Australia. From the mid 1990s, inflation fell to 2-3% in the <a href="https://www.inflationtool.com/rates/usa/historical">US</a>, the <a href="https://www.inflationtool.com/rates/uk/historical">UK</a>, <a href="https://www.inflationtool.com/rates/canada/historical">Canada</a> and just about every other Western nation, as China deluged the world with low-priced goods and companies began offshoring.</p>
<p>It got to the point where almost as many prices were falling as rising.</p>
<p>The US economic historian Adam Tooze says it’s reasonable to ask whether we had inflation at all from the mid 1990s onwards.</p>
<p>The Bank for International Settlements defines inflation as a “<a href="https://cdn.theconversation.com/static_files/files/2234/Inflation_under_the_Hood_Extract_from_Annual_Economic_Report_2022_of_the_BIS.pdf">largely synchronous increase in the prices of goods and services</a>” – a situation where prices broadly climb together. </p>
<h2>Little real inflation for 30 years</h2>
<p>It needs to be largely synchronous to qualify as inflation because otherwise the amount a dollar can buy isn’t clearly changing – any such effect is overwhelmed by changes in the <a href="https://adamtooze.com/2022/07/04/chartbook-134-inflation-as-an-emergent-macroeconomic-phenomenon/">mix</a> of goods and services a dollar can buy.</p>
<p>It is only when prices start to move together, as they are now, that inflation gets normalised and becomes entrenched.</p>
<p>Twenty years ago, in June 2002, by my count 20 of the 87 types of items that made up the consumer price index fell in price. Ten years ago, <a href="https://cdn.theconversation.com/static_files/files/2235/Quarterly_percentage_change_in_sub-groups_in_the_CPI.xlsx?1659405191">32</a> fell in price.</p>
<p>By economist Saul Eslake’s count, this June only <a href="https://www.sauleslake.info/the-australian-economy-this-week-2022-04-08/">15</a> of what are now 90 expenditure classes fell in price – what appears to be the lowest number in decades.</p>
<h2>Suddenly, price rises are synchronised</h2>
<p>It means the Reserve Bank is having to deal with broad-based inflation of a kind it hasn’t faced since it <a href="https://theconversation.com/the-rba-has-got-a-lot-right-but-theres-still-a-case-for-an-inquiry-184314">began targeting inflation</a> in the early 1990s.</p>
<p>Just about the only tool it has to do it – higher interest rates – makes people poorer.</p>
<p>Higher interest rates work in other ways as well. </p>
<ul>
<li><p>they increase the reward for saving, diverting some money from spending</p></li>
<li><p>they make it harder to borrow, diverting more money from spending</p></li>
<li><p>and they push up the exchange rate, making imported goods cheaper – or they would have, were other central banks not also pushing up their rates, meaning the Australian dollar is no higher than it was when the bank began pushing up rates in May.</p></li>
</ul>
<p>But their chief effect is impoverishing variable mortgage holders, to the tune of <a href="https://theconversation.com/expect-the-rba-to-go-easy-on-interest-rate-hikes-from-now-on-we-cant-afford-rates-to-climb-as-steeply-as-the-market-expects-184539">hundreds of dollars a month</a>.</p>
<p>The more variable mortgage rates go up (Tuesday’s hike will push up the ANZ standard rate from 4.24% to 4.74%) the less mortgage holders have to spend on other things, and the less they will add to price pressure.</p>
<p>That’s the idea. And it is disingenuous to pretend otherwise.</p>
<h2>Mortgage buffers are scant protection</h2>
<p>In a speech last month Reserve Bank Deputy Governor Michele Bullock said households in aggregate were “<a href="https://www.rba.gov.au/speeches/2022/sp-dg-2022-07-19.html">well positioned</a>”. </p>
<p>They had saved $260 billion since the start of the pandemic, much of which had gone into redraw facilities and offset and deposit accounts. </p>
<p>Around half were almost two years ahead on mortgage payments, or more. They had “large buffers”.</p>
<p>But, as University of Newcastle economist Bill Mitchell points out, by the bank’s own logic, this just means it will have to <a href="http://bilbo.economicoutlook.net/blog/?p=50074">squeeze them harder</a>.</p>
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Read more:
<a href="https://theconversation.com/the-rbas-rate-hikes-will-add-hundreds-to-monthly-mortgage-payments-182241">The RBA's rate hikes will add hundreds to monthly mortgage payments</a>
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<p>It wants Australians to spend less and, if they use their buffers to keep spending as they have, it will have to either give up, or push rates higher until they do.</p>
<p>RBA Governor Philip Lowe says he is navigating a “<a href="https://www.rba.gov.au/media-releases/2022/mr-22-21.html">narrow path</a>” to curb inflation without too much pain. He can’t be certain he knows the way.</p><img src="https://counter.theconversation.com/content/188011/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Never, in the three decades the Reserve Bank has been targeting inflation, has it been tested by prices rising in unison like this.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1872882022-07-19T12:31:33Z2022-07-19T12:31:33ZInternational expert to review Reserve Bank as deputy governor says households in ‘fairly good position’ on rate rises<figure><img src="https://images.theconversation.com/files/474858/original/file-20220719-24-tnjlyw.png?ixlib=rb-1.1.0&rect=613%2C213%2C2315%2C1169&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Carolyn Wilkins,</span> <span class="attribution"><span class="source">Bank of Canada</span></span></figcaption></figure><p>An international expert on monetary policy, Carolyn Wilkins, is one of a three-member panel that will conduct a broad review of the Reserve Bank, including its objectives and the interaction of monetary and fiscal policy. </p>
<p>Professor Wilkins is an external member of the financial policy committee of the Bank of England and former senior deputy governor to the Bank of Canada.</p>
<p>The other panelists are professor Renee Fry-McKibbin, interim director of the Crawford School of Public Policy at the Australian National University, and Gordon de Brouwer, recently appointed by the Albanese government as Secretary for Public Sector Reform. </p>
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Read more:
<a href="https://theconversation.com/rates-climb-to-1-35-rba-on-mission-to-whip-inflation-186212">Rates climb to 1.35% – RBA on mission to whip inflation</a>
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<p>The terms of reference and the panelists will be announced formally by Treasurer Jim Chalmers at a news conference on Wednesday. </p>
<p>Chalmers said in a statement: “Australia is facing a complex and rapidly changing economic environment, as well as a range of long-term economic challenges.</p>
<p>"This is an important opportunity to ensure that our monetary policy framework is the best it can be, to make the right calls in the interests of the Australian people and their economy.</p>
<p>"The Review will consider the RBA’s objectives, mandate, the interaction between monetary, fiscal and macroprudential policy, its governance, culture, operations, and more,” Chalmers said. </p>
<h2>Households in good position</h2>
<p>Meanwhile in a Tuesday speech Michele Bullock, a deputy governor of the bank, said that on balance “as a whole households are in a fairly good position” to cope with interest rate rises. </p>
<p>“The sector as a whole has large liquidity buffers, most households have substantial equity in their housing assets, and lending standards in recent years have been more prudent and have built in larger buffers for interest rate increases,” Bullock said. </p>
<p>“Much of the debt is held by high-income households that have the ability to service their debt and many borrowers are already making repayments well above what is required. </p>
<p>"Furthermore, those on very low fixed-rate loans have some time to prepare themselves for higher interest rates.”</p>
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Read more:
<a href="https://theconversation.com/the-rbas-failure-to-cut-rates-faster-may-have-cost-270-000-jobs-185381">The RBA's failure to cut rates faster may have cost 270,000 jobs</a>
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<p>But although this was the overall situation, Bullock said some households would be in a more difficult position.</p>
<p>“While in aggregate it seems unlikely that there will be substantial financial stability risks arising from the household sector, risks are a little elevated. Some households will find interest rate rises impacting their debt servicing burden and cash flow.</p>
<p>"While the current strong growth in employment means that people will have jobs to service their mortgages, the way the risks play out will be influenced by the future path of employment growth. </p>
<p>"This, along with the board’s assessment of the outlook for inflation, will be important considerations in deciding the size and timing of future interest rate increases.”</p>
<p>Bullock’s comments come as another rate rise looms early next month.</p>
<h2>Bipartisan review</h2>
<p>The review of the bank has been supported by both sides of politics. </p>
<p>Chalmers said it is the first wide-ranging inquiry into the bank since the current monetary policy arrangements started in the 1990s. </p>
<p>Critics have recently targeted the bank’s forecasting and setting of monetary policy. In particular, it flagged it would not be raising interest rates before 2024, only to then have to resort to doing so to address ballooning inflation. </p>
<p>An <a href="https://theconversation.com/open-letter-the-rba-review-should-be-independent-of-government-184040">open letter</a> from 12 leading economists, published in The Conversation in May, called for a review that was completely independent of both the government and the bank, ideally headed by an internationally recognised foreign expert.</p>
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Read more:
<a href="https://theconversation.com/open-letter-the-rba-review-should-be-independent-of-government-184040">Open letter: the RBA review should be independent of government</a>
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<p>“No institution can be expected to independently or credibly review itself,” the letter said. “A foreign perspective would bring valuable external scrutiny to the process and enable a benchmarking of the RBA against its overseas counterparts.”</p>
<p>Lowe had appeared to resist the idea of an open review in March when he said he hoped that one of the things that would come out of it would be a Canadian-style <a href="https://www.rba.gov.au/speeches/2022/sp-gov-2022-03-22-q-and-a-transcript.html">bureaucratic review</a> every five years.</p>
<p>“It is depoliticised, it is kind of technical, and the government, through the Canadian Treasury, and the central bank work on a re-commitment,” he said.</p>
<p>Among the signatories to the letter were economists Saul Eslake, Chris Richardson, Peter Tulip, Danielle Wood, Richard Holden, Steven Hamilton and former RBA board member Warwick McKibbin, who is married to Renee Fry-McKibbin who will be on the review panel.</p>
<h2>Composition of board in the mix</h2>
<p>The inquiry will consult experts and the public and report in March. </p>
<p>Centrally the inquiry will examine the bank’s objectives, including the “continued appropriateness of the inflation targeting framework”.</p>
<p>It will look at “the interaction of monetary policy with fiscal and macroprudential policy, including during crises and when monetary policy space is limited”. </p>
<p>While this will cover macroprudential governance arrangements, the Australian Prudential Regulation Authority’s statutory role and functions are excluded. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-the-rba-should-go-easy-on-interest-rate-hikes-inflation-may-already-be-retreating-and-going-too-hard-risks-a-recession-182273">Why the RBA should go easy on interest rate hikes: inflation may already be retreating and going too hard risks a recession</a>
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<p>The inquiry will assess how the bank is meeting its objectives, “including its choice of policy tools, policy implementation, policy communication, and how trade-offs between different objectives have been managed”. </p>
<p>It will scrutinise the bank’s governance and accountability. This will take in the structure and composition of the board – opening up the debate about the balance between expertise and other factors in appointments – and the appointments process. </p>
<p>While the terms of reference also cover the bank’s management and recruitment, some areas including banknote production will be excluded from the review.</p><img src="https://counter.theconversation.com/content/187288/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michelle Grattan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The review will examine the bank’s Act, its inflation target, its management and recruitment process and the composition of its board.Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1853812022-06-20T19:57:02Z2022-06-20T19:57:02ZThe RBA’s failure to cut rates faster may have cost 270,000 jobs<figure><img src="https://images.theconversation.com/files/469692/original/file-20220620-18-uclstg.png?ixlib=rb-1.1.0&rect=0%2C736%2C3982%2C1820&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The Reserve Bank of Australia is about to be put under the microscope in the first major review of its performance in at least 30 years, and perhaps <a href="https://theconversation.com/australias-reserve-bank-has-got-a-lot-right-but-theres-still-a-case-for-an-inquiry-184314">forever</a>.</p>
<p>In research published this month in the <a href="https://onlinelibrary.wiley.com/doi/epdf/10.1111/1475-4932.12689">Economic Record</a>, Australian Labor member of parliament Andrew Leigh and myself analyse how the bank has set interest rates over the past two decades and grade its performance.</p>
<p>To do this we use the RBA‘s own model (called <a href="https://theconversation.com/the-rba-has-a-new-brain-it-has-thoughts-on-whatll-happen-after-interest-rates-hit-zero-126765">MARTIN</a>) to evaluate how well it has achieved its <a href="https://www.rba.gov.au/publications/annual-reports/rba/2015/our-charter-core-functions-and-values.html">two key goals</a> of full employment and price stability.</p>
<p>We examine the bank’s performance across three periods:</p>
<ol>
<li><p>The global downturn that began in 2001</p></li>
<li><p>The global financial crisis that began in 2008</p></li>
<li><p>The four pre-pandemic years from 2016 to 2019, in which inflation was below the bank’s 2-3% target band.</p></li>
</ol>
<h2>Top marks for the first two crises</h2>
<p>We find that in each of the first two crises the bank did a good job. In the face of large economic shocks it cut interest rates to save jobs.</p>
<p>Low interest rates make it easier for businesses and households to borrow and spend. From 2001 the rate cuts lowered unemployment from 7% to less than 6%.</p>
<p>During the global financial crisis the bank again aggressively cut interest rates.</p>
<p>The bank’s model suggests that had it not decreased rates unemployment would have climbed to almost 8%. Instead, it fell to 5%, never even climbing as high as 6%. </p>
<p>The mark we assign to the bank for each of these two periods is a solid “A”.</p>
<h2>A pre-COVID failure that cost people work</h2>
<p>But we find that between 2016 and 2019 the bank dramatically under-performed. </p>
<p>During this period the economy entered a slump. Economic growth sank, wage growth was anaemic and inflation hovered below the bank’s target band.</p>
<p>The bank did cut its cash rate, but not by much, from 1.75% to 0.75%.</p>
<p>This relative inaction meant unemployment was kept higher than was necessary.</p>
<p>Relative to the optimal path identified by the RBA‘s model, we find this cost the equivalent of 270,000 people being out of work for one year.</p>
<h2>The high cost of high interest rates</h2>
<p>270,000 jobs is a big deal. By way of comparison, Melbourne’s suburban rail loop is estimated to create only <a href="https://bigbuild.vic.gov.au/jobs/working-on-suburban-rail-loop">8,000 jobs</a> when construction starts on the first stage, while the national inland rail project is estimated to create around <a href="https://inlandrail.artc.com.au/opportunities/jobs/">20,000 jobs</a>. Closing Australia’s border is estimated to have cost <a href="https://theconversation.com/australias-closed-border-is-costing-the-economy-36-5-million-a-day-160873">72,000 jobs</a>.</p>
<p>Each of these is a massive public project or decision, but they are dwarfed by the bank’s decision to run the economy to slow over that four year period.</p>
<p>The stance taken by the bank under Governor Philip Lowe during those four years amounts to a substantial error. Such an error warrants a grade of “C-” at best. </p>
<h2>Too much concern about home prices?</h2>
<p>One explanation for this error might be that the bank didn’t want to boost house prices. </p>
<p>Governor Lowe told a business audience in 2017 that while he would like the economy to grow a bit more,</p>
<blockquote>
<p>if we were to try to achieve that through monetary policy that would encourage people to borrow more and it would probably put upward pressure on housing prices. At the moment I don’t think those two things are in the national interest.</p>
</blockquote>
<p>More recently he has backed away from the idea, telling the National Press Club in 2022 he did not think the idea of making the bank responsible for home prices <a href="https://www.rba.gov.au/speeches/2022/sp-gov-2022-02-02-q-and-a-transcript.html">made sense</a>. </p>
<p>Using interest rates to restrain house prices is known as “leaning against the wind”. The Reserve Bank’s own researchers have found the costs of leaning against the wind are <a href="https://www.rba.gov.au/publications/rdp/2019/2019-05.html">three to eight times larger</a> than the benefit of avoiding financial crises. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-rba-has-got-a-lot-right-but-theres-still-a-case-for-an-inquiry-184314">The RBA has got a lot right, but there's still a case for an inquiry</a>
</strong>
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</p>
<hr>
<p>We have been in a very different situation since. During COVID, the bank cut rates further than it once thought possible and helped push unemployment down to a 48-year low of 3.9%. And now it has begun to push rates back up.</p>
<p>But the best way to avoid repeating mistakes is to acknowledge and diagnose them. Hopefully the review can help illuminate where such errors have occurred so that the bank can do better in the future.</p><img src="https://counter.theconversation.com/content/185381/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Isaac Gross does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Looking back at the Reserve Bank’s performance in setting interest rates over the past generation, we’d grade it an A for earlier years – but a fail for the years just before the pandemic. Here’s why.Isaac Gross, Lecturer in Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1843142022-06-09T20:05:53Z2022-06-09T20:05:53ZThe RBA has got a lot right, but there’s still a case for an inquiry<figure><img src="https://images.theconversation.com/files/467943/original/file-20220609-18-oq8dcw.png?ixlib=rb-1.1.0&rect=281%2C413%2C3634%2C1736&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Bianca de Marchi/AAP</span></span></figcaption></figure><p>Treasurer Jim Chalmers is about to commission an independent review of the Reserve Bank of Australia. Refreshingly, his election promise was bipartisan – both sides of politics want it.</p>
<p>What we don’t know yet is who will conduct the inquiry and what it will look at.</p>
<p>In something of a cultural cringe, 12 leading Australian economists have called for an <a href="https://theconversation.com/open-letter-the-rba-review-should-be-independent-of-government-184040">international expert</a> to conduct it – someone like a former governor of the Bank of England. </p>
<p>There is a lot to examine. But in our view, this does not include its record in hitting its inflation target, which has been near perfect and better than its peers.</p>
<p>In 1981 the <a href="https://treasury.gov.au/publication/p1981-afs">Campbell</a> inquiry into the financial system examined some aspects of the Reserve Bank’s structure and operations. But there has been no systematic review of its goals or the means of achieving them since the bank was established in 1960 – and arguably earlier, when the same goals were set out in the <a href="https://www.rba.gov.au/about-rba/history/">Commonwealth Bank Act of 1945</a>. </p>
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<iframe width="440" height="260" src="https://www.youtube.com/embed/MqJza4y96Us?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">The Reserve Bank and interest rates: Explained - Selwyn Cornish, ANU, April 2010.</span></figcaption>
</figure>
<h2>Experiments, then inflation</h2>
<p>Half a century ago Australia abandoned its fixed exchange rate with the <a href="https://www.rba.gov.au/speeches/1997/sp-gov-290997.html">British pound</a>.</p>
<p>What followed was a long meandering journey, in which, in the words of the current Reserve Bank governor Philip Lowe, Australia experimented with almost <a href="https://www.rba.gov.au/speeches/2013/sp-dg-240413.html">every type of exchange rate regime</a> until floating the dollar in 1983. </p>
<p>For a while, the bank bought and sold financial instruments to stabilise the <a href="https://www.rba.gov.au/publications/confs/1997/grenville.html">supply of money</a> in the economy, but money turned out to change shape when cornered, requiring ever-changing definitions and making it an imperfect instrument to control inflation.</p>
<p>Needing something else to target, in the mid-1980s the bank developed a much-lampooned “<a href="https://www.rba.gov.au/speeches/1998/sp-gov-150998.html">checklist</a>” which included everything but the kitchen sink:</p>
<blockquote>
<p>all the monetary aggregates; interest rates; the exchange rate; the external accounts; the current performance and outlook for the economy, including movements in asset prices, inflation, the outlook for inflation, and market expectations about inflation.</p>
</blockquote>
<p>It turned out to be so comprehensive as to provide neither discipline or guidance.</p>
<p>When in 1990 New Zealand became the first country in the world to formally target the rate of inflation and the rate of inflation alone (at first targeting a rate of 0-2%) Australia and other nations including Canada took notice.</p>
<p>Australia’s Reserve Bank Governor Bernie Fraser and then head of research Ian Macfarlane tried, and failed, to get the Hawke government to announce an inflation target <a href="https://www.tandfonline.com/doi/full/10.1080/10370196.2019.1615401">in 1990</a>.</p>
<p>From <a href="https://www.tandfonline.com/doi/full/10.1080/10370196.2019.1615401">1992</a> Fraser began referring in speeches to his goal of keeping inflation near 2-3%, and by 1994 Keating government ministers began quoting the goal of 2-3%. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/memo-rba-we-ought-to-live-with-inflation-more-of-it-184380">Memo RBA: we ought to live with inflation, more of it</a>
</strong>
</em>
</p>
<hr>
<p>In <a href="https://www.rba.gov.au/publications/bulletin/1996/sep/pdf/bu-0996-1.pdf">1996</a> Treasurer Peter Costello and Governor Ian Macfarlane signed a formal agreement acknowledging an objective of keeping underlying inflation between 2% and 3% on average over the economic cycle. </p>
<p>By adjusting how much it borrows, or lends, in the overnight interbank market the bank can influence the “<a href="https://www.rba.gov.au/mkt-operations/resources/cash-rate-methodology/overview.html">cash rate</a>” that banks charge each other and through it the general price of money, and hopefully, the rate of inflation.</p>
<h2>Success, by numbers</h2>
<p>On the numbers, this has been a success with the inflation target achieved.</p>
<p>Between March 1994 and the onset of COVID in the March quarter of 2000, inflation has averaged 2.48% – bang in the middle of the 2-3% target band.</p>
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<p><iframe id="wiD60" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/wiD60/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
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<p>As well, until the COVID shutdowns, Australia avoided recession, escaping both the 2001 “<a href="https://www.businessinsider.com/personal-finance/what-is-a-recession?op=1">tech-wreck</a>” recession that ravaged the United States and the 2008 “<a href="https://www.investopedia.com/terms/g/great-recession.asp">Great Recession</a>” during the global financial crisis. </p>
<p>Under the Reserve Bank’s inflation-targeting regime <a href="https://theconversation.com/at-3-9-australias-unemployment-rate-now-officially-begins-with-3-183226">unemployment</a> has fallen to its lowest in almost fifty years.</p>
<p>This is a record at least as good as other central banks and better than most. A review is unlikely to much improve Australia’s economic performance.</p>
<h2>But there’s a case for a review</h2>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/467934/original/file-20220609-20-xcac9o.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/467934/original/file-20220609-20-xcac9o.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=972&fit=crop&dpr=1 600w, https://images.theconversation.com/files/467934/original/file-20220609-20-xcac9o.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=972&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/467934/original/file-20220609-20-xcac9o.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=972&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/467934/original/file-20220609-20-xcac9o.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1221&fit=crop&dpr=1 754w, https://images.theconversation.com/files/467934/original/file-20220609-20-xcac9o.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1221&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/467934/original/file-20220609-20-xcac9o.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1221&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">The first RBA governor HC ‘Nugget’ Coombs.</span>
<span class="attribution"><span class="source">National Library of Australia</span></span>
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<p>The first governor of the Reserve Bank, HC Coombs, wanted a review of the financial system every five years, an idea blocked by the treasury.</p>
<p>Yet there are things about the workings of the bank that need to be examined. One is the composition of the <a href="https://www.rba.gov.au/about-rba/boards/rba-board.html">bank board</a>. </p>
<p>Under former Treasurer Josh Frydenberg the board became majority female, and gained more independent members with economic expertise.</p>
<p>Until Peter Costello’s term as treasurer in the 1990s the board included a trade union leader. </p>
<p>There might be a case for bringing back union representation and adding social service representation to balance business interests.</p>
<p>There might be a case for releasing more information about the board’s deliberations, or for separating governance of its administration from the governance of monetary policy.</p>
<p>The Bank’s recruitment and promotion policies could be reviewed. Its preference for internal appointments preserves corporate memory but risks “<a href="https://www.verywellmind.com/what-is-groupthink-2795213">groupthink</a>”.</p>
<p>And there would be a case for examining the mechanics of its bond-buying program (“<a href="https://www.rba.gov.au/education/resources/explainers/pdf/unconventional-monetary-policy.pdf">quantitative easing</a>”) and its communications (“<a href="https://www.rba.gov.au/education/resources/explainers/pdf/unconventional-monetary-policy.pdf">forward guidance</a>”) during the COVID crisis. There’s already a review into whether it should issue a <a href="https://www.rba.gov.au/payments-and-infrastructure/central-bank-digital-currency/">digital currency</a>, a prospect about which it seems <a href="https://theconversation.com/australia-is-investigating-a-digital-currency-or-e-dollar-but-its-benefits-seem-slight-and-the-risks-to-privacy-large-180099">unkeen</a>.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/open-letter-the-rba-review-should-be-independent-of-government-184040">Open letter: the RBA review should be independent of government</a>
</strong>
</em>
</p>
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<p>Almost no one wants to revert to a fixed exchange rate, but the inflation target and the method the bank has used to achieve it ought to be open for scrutiny.</p>
<p>Some argue the bank has kept interest rates too low forcing up <a href="https://www.theguardian.com/australia-news/2016/dec/01/as-australias-housing-bubble-gets-bigger-the-reserve-bank-prepares-to-blame-trump">house prices</a> and <a href="https://theconversation.com/are-low-interest-rates-increasing-inequality-no-says-the-worlds-central-bank-163480">widening inequality</a>. Others argue it has kept rates too high, allowing needless <a href="https://isaacgrossnet.files.wordpress.com/2022/05/gross-and-leigh-2022-assessing-australian-monetary-policy-in-the-twenty-first-century.pdf">unemployment</a>.</p>
<p>It’s hard to argue it’s done too much wrong. In recent years there have been independent reviews of the <a href="https://www.federalreserve.gov/monetarypolicy/review-of-monetary-policy-strategy-tools-and-communications.htm">US Federal Reserve</a>, the Bank of Japan, the Bank of England and the <a href="https://www.ecb.europa.eu/home/search/review/html/index.en.html#:%7E:text=The%20aim%20of%20the%20ECB%E2%80%99s%20strategy%20review%20was,our%20mandate%2C%20which%20is%20to%20maintain%20price%20stability.">European Central Bank</a>.</p>
<p>It is notable they have often recommended moving <em>toward</em> the monetary policy framework used by the Reserve Bank of Australia.</p><img src="https://counter.theconversation.com/content/184314/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>I am the Reserve Bank of Australia's Official Historian</span></em></p><p class="fine-print"><em><span>John Hawkins is a former senior economist with the Reserve Bank and the Bank for International Settlements. </span></em></p>Critics ought to acknowledge that on average over time Australia’s Reserve Bank has met its inflation target, but it is worthwhile examining the way it is run.Selwyn Cornish, Adjunct Associate Professor, Research School of Economics, Australian National UniversityJohn Hawkins, Senior Lecturer, Canberra School of Politics, Economics and Society, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1843802022-06-06T20:01:39Z2022-06-06T20:01:39ZMemo RBA: we ought to live with inflation, more of it<figure><img src="https://images.theconversation.com/files/467148/original/file-20220606-22-67yb4c.png?ixlib=rb-1.1.0&rect=317%2C388%2C2354%2C1006&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Later today, everyone expects the Reserve Bank board will push up its cash interest rate for the second consecutive month. </p>
<p>Why? According to the board’s <a href="https://www.rba.gov.au/monetary-policy/rba-board-minutes/2022/2022-05-03.html">official minutes</a>, it’s: </p>
<blockquote>
<p>to ensure that inflation in Australia returns to the target over time </p>
</blockquote>
<p>Some increase in interest rates is justified simply because with higher inflation, real interest rates are now negative. But the idea of returning to the old target range does not stand up to scrutiny. </p>
<p>Once the current spike in inflation is over, we need to reconsider both the target range and the whole idea of inflation targeting.</p>
<h2>How much inflation are we aiming for now?</h2>
<p>The Reserve Bank’s inflation target is consumer price inflation of <a href="https://www.rba.gov.au/monetary-policy/framework/stmt-conduct-mp-7-2016-09-19.html">2-3%</a>, on average, over time. </p>
<p>Yet for most of the past ten years that target has been missed, on the downside, as you can see below.</p>
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<p>But, just recently, consumer price inflation has jumped to 5.1%, and the so-called “<a href="https://www.rba.gov.au/education/resources/explainers/inflation-and-its-measurement.html">trimmed mean</a>” measure of underlying inflation watched closely by the bank has jumped to 3.7%.</p>
<h2>Recent inflation is partly a sign of success</h2>
<p>While too much inflation can be a problem, it is important to remember that the jump is partly an unintended consequence of success. </p>
<p>Massive public spending offset the impact of COVID and lockdowns on household outcome, and set the stage for a rapid economic recovery.</p>
<p>This spending was necessary, but inevitably went to businesses that didn’t need it.</p>
<p>Further, the success of working from home meant many households suffered no reduction in income and were freed of the need to spend as much on travel and clothes, and things such as makeup that go with travelling to work.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/at-3-9-australias-unemployment-rate-now-officially-begins-with-3-183226">At 3.9%, Australia's unemployment rate now officially begins with '3'</a>
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<p>As restrictions have eased, households and businesses have been keen to spend some of their accumulated savings, at a time when goods production has been disrupted, especially by the anti-COVID measures in China. </p>
<p>The result has been <a href="https://www.investopedia.com/articles/05/012005.asp">classic inflation</a> of the kind where “too much money chases too few goods”.</p>
<p>It is very different from Australia’s last major episode of inflation, in the 1960s and 1970s, which was commonly seen as a “<a href="https://www.economicshelp.org/blog/glossary/wage-price-spiral/">wage-price spiral</a>” or “<a href="https://www.investopedia.com/articles/05/012005.asp">cost-push inflation</a>”. </p>
<h2>This isn’t wage-driven inflation</h2>
<p>Cost-push inflation was generally seen as arising when powerful unions demanded large wage rises, which were passed on to consumers by corporations with monopoly power. </p>
<p>In the current environment, while monopoly power is still a problem, unions are a shadow of their former selves, with little power to extract out-sized increases. </p>
<p>The result is that wages, as measured by the Bureau of Statistics wage price index, grew by only <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/wage-price-index-australia/latest-release">2.4%</a> in the year to March, well behind inflation of <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release">5.1%</a>. </p>
<p>This has continued a long downward trend in the wage share of national income.</p>
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<p><iframe id="tYiy2" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/tYiy2/1/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
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<p>Despite the obvious absence of wage-push, many commentators are still working on the wage-price spiral model, and <a href="https://www.theaustralian.com.au/business/the-rba-has-three-options-on-tuesday-but-none-are-easy/news-story/85060f1ec07d280ae5667a8975f3d15d">arguing against</a> allowing wages to rise in line with inflation. </p>
<p>Such a policy would not only be unfair, it would be economically disastrous – similar to the <a href="https://www.businessinsider.com/austerity-has-damaged-europe-vs-us-gdp-growth-2018-11?op=1">austerity policies</a> introduced in many countries in the wake of the global financial crisis, and earlier, when Britain returned to the gold standard in the wake of World War I, helping <a href="https://www.taylorfrancis.com/chapters/edit/10.4324/9780203067871-22/britain-withdrawal-gold-standard-end-epoch-michael-kitson">precipitate and deepen the great depression</a>.</p>
<p>In the current context, real wage cuts brought about by less than full compensation for inflation would lead workers to quit and seek new jobs, worsening labour shortages. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/national-income-is-climbing-but-the-share-going-to-wages-is-shrinking-183916">National income is climbing, but the share going to wages is shrinking</a>
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<p>It is striking that many of the same employer representatives who are saying wage increases are <a href="https://www.theaustralian.com.au/business/economics/rba-predicts-real-wage-cuts-until-2023-despite-accelerating-pay-growth/news-story/7aceeadfbbb0a67aa82116dfcb3c758f">unaffordable</a> are also complaining it’s <a href="https://www.australianchamber.com.au/news/labour-shortages-to-hit-manufacturing/">hard to find workers</a>. </p>
<p>The correct response to the huge expansion in the amount of money in the economy during the crisis is to accept a once-off increase in prices and wages, as well as incomes indexed to wages and prices, such as pensions. </p>
<h2>For now, prices should flow through into wages</h2>
<p>This would share the real costs of the pandemic spending more evenly across the community than if wage-earners were expected to bear the burden.</p>
<p>Later, we can return to the use of monetary policy, based on adjustments in the Reserve Bank cash rate, to maintain inflation at an acceptable level. But what should that level be?</p>
<p>For the past 30 years or so, the RBA has targeted an inflation rate of 2-3%, but the rationale for a rate that low was always weak, and has since broken down.</p>
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<p>
<em>
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Read more:
<a href="https://theconversation.com/real-wages-are-shrinking-these-figures-put-it-beyond-doubt-183343">Real wages are shrinking, these figures put it beyond doubt</a>
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<p>In the 1990s, the main argument for a low target rate of inflation was the need to break expectations created by decades of high inflation. </p>
<p>By contrast, the current inflationary episode is more like the brief inflationary bursts of the 1950s, which vanished once the drivers of inflation were removed.</p>
<p>Even during the heyday of inflation targeting, critics argued that low inflation in goods and services prices <a href="https://www.semanticscholar.org/paper/Asset-Price-Instability-and-Policy-Responses%3A-The-Bell-Quiggin/7786d6cc2c20bc45c9db451a682025282a71fba4">contributed to asset price instability</a>, potentially giving rise to financial crises. </p>
<p>Many, <a href="https://johnquigginblog.substack.com/p/the-6-4-2-solution?s=w">including myself</a>, have long preferred an inflation target of <a href="https://www.imf.org/external/pubs/ft/spn/2010/spn1003.pdf%20economists%20https://www.nytimes.com/2022/06/03/opinion/inflation-federal-reserve.html">4%</a>. Now there’s a new argument for it.</p>
<h2>In time, we will need a new target</h2>
<p>A central concept in monetary policy is the <a href="https://www.brookings.edu/blog/up-front/2018/10/22/the-hutchins-center-explains-the-neutral-rate-of-interest/">neutral real rate of interest</a>: that is, the interest rate adjusted for inflation at which monetary policy is neither expansionary nor contractionary. </p>
<p>Over the past twenty years the neutral real rate is believed to have fallen to <a href="https://www.ampcapital.com/au/en/insights-hub/articles/2022/april/econosights-the-rba-the-neutral-interest-rate-and-how-many-hikes-to-expect">close to zero</a>, or possibly even less, meaning that if inflation is 2-3%, the neutral actual rate should be 2-3%.</p>
<p>But the nail is hard to hit. Actual rates of interest set by central banks tend to vary around the neutral rate, by as much as three percentage points either way. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/open-letter-the-rba-review-should-be-independent-of-government-184040">Open letter: the RBA review should be independent of government</a>
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<p>This raises the prospect of the target cash rate going negative, and interest rates can’t usually go far below zero. We’ve seen this “zero lower bound” operating in Australia and elsewhere for years now.</p>
<p>So, if we are to continue with inflation targeting, and get it right, it will be necessary to raise the 2-3% inflation target.</p>
<p>Given the obvious political difficulties of doing this, it may be better to abandon inflation targeting altogether, as suggested for some time by <a href="https://www.afr.com/policy/economy/the-rba-needs-a-new-post-virus-monetary-policy-game-20200505-p54ptw">myself</a> and economists backed by former Senator <a href="https://theconversation.com/explainer-why-some-economists-think-the-rba-should-drop-its-inflation-target-64265">Nick Xenophon</a>.</p>
<p>It’s one of a number of ideas likely to be put to the <a href="https://theconversation.com/open-letter-the-rba-review-needs-to-be-completely-independent-of-government-184040">independent review</a> of the Reserve Bank promised by Treasurer Jim Chalmers during the election.</p><img src="https://counter.theconversation.com/content/184380/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Quiggin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>For the past 30 years or so, the RBA has targeted an inflation rate of 2-3%. But the rationale for a rate that low was always weak, and has since broken down.John Quiggin, Professor, School of Economics, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1814652022-05-01T20:06:15Z2022-05-01T20:06:15ZCentral banks hunt in packs. Here’s why ours ought to be wary<figure><img src="https://images.theconversation.com/files/460424/original/file-20220428-4038-f4y8jt.png?ixlib=rb-1.1.0&rect=888%2C272%2C1609%2C888&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Japan Ministry of Finance/Shutterstock.</span></span></figcaption></figure><p>The Reserve Bank’s cash rate is in the news, and in an <a href="https://theconversation.com/inflation-hits-an-extraordinary-5-1-how-long-until-mortgage-rates-climb-181832">unwelcome way</a> for the first time in 11 years.</p>
<p>After a decade in which Australia’s central bank has only moved its cash rate in one direction (<a href="https://www.rba.gov.au/statistics/cash-rate/">down</a>) while trying to ignite inflation, it is now poised to push its cash rate up in a bid to douse those flames.</p>
<p>Central banks hunt in packs – partly because they face the same problems, partly because they are advised by the same sort of economists, and partly because they are, in the words of The Kinks, <a href="https://youtu.be/tqXrAHuLksU">dedicated followers of fashion</a>.</p>
<p>Inflation has spiked and central banks have pushed up their versions of the cash rate in the United States, the United Kingdom, New Zealand, Canada and elsewhere. So there’s a very good chance we will too.</p>
<p>Apart from anything else, if we didn’t push up our rates when other countries were raising theirs, our currency would sink. So there’s mileage in running with the pack, even if we later discover the pack has been running in the wrong direction. </p>
<h2>Fashion statements</h2>
<p>From the 1940s to the 1970s, central banks kept interest rates low, relying on <a href="https://www.richmondfed.org/publications/research/econ_focus/2021/q1/economic_history">heavy financial regulation</a> to limit borrowing, and on fixed or regulated exchange rates to control the value of their currencies. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/460505/original/file-20220429-25-qbw5dq.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/460505/original/file-20220429-25-qbw5dq.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/460505/original/file-20220429-25-qbw5dq.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=968&fit=crop&dpr=1 600w, https://images.theconversation.com/files/460505/original/file-20220429-25-qbw5dq.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=968&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/460505/original/file-20220429-25-qbw5dq.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=968&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/460505/original/file-20220429-25-qbw5dq.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1216&fit=crop&dpr=1 754w, https://images.theconversation.com/files/460505/original/file-20220429-25-qbw5dq.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1216&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/460505/original/file-20220429-25-qbw5dq.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1216&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Followers of fashion.</span>
<span class="attribution"><a class="source" href="https://www.pexels.com/@eliazanrosso/">Elia Zanrosso/Pexels</a></span>
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</figure>
<p>Then came two wars in the Middle East, in <a href="https://www.federalreservehistory.org/essays/oil-shock-of-1973-74">1973</a> and <a href="https://gearsofhistory.com/home/2018/11/9/iran-iraq-war-the-20th-centuries-third-total-war-saddam-attacks-1979-1980">1979</a>, which drove dramatic increases in the price of oil, forcing inflation to spike and fashions to change.</p>
<p>From the early 1980s, <a href="https://www.investopedia.com/terms/m/monetarism.asp">monetarism</a> was the fad, so central bankers set targets for growth in their money supplies, and used very high interest rates in an attempt to hit those targets. </p>
<p>They found high interest rates an ineffective tool, partly because governments had just deregulated financial institutions and private banks kept creating money, regardless of how high the central banks pushed up interest rates.</p>
<h2>Monetarism, then inflation targeting</h2>
<p>But the interest rates helped bring on <a href="https://bancroft.berkeley.edu/ROHO/projects/debt/1980srecession.html">recessions</a> and mass unemployment. </p>
<p>These at least got inflation back down, even though the inflation genie temporarily escaped from its bottle again in the late 1980s, leading to further hikes in interest rates and <a href="https://en.wikipedia.org/wiki/Early_1990s_recession">another set of recessions</a>.</p>
<p>By the early 1990s, it was clear targeting money supply wasn’t the answer, so the central banks shifted to <a href="https://www.rba.gov.au/speeches/2018/sp-dg-2018-04-12.html">targeting inflation itself</a>. </p>
<p>“Why hadn’t they thought of that before?” you might ask. </p>
<h2>All about the cash rate</h2>
<p>In Australia, the Reserve Bank would adjust (or attempt to adjust) the so-called <a href="https://www.rba.gov.au/glossary/?search=Cash%20Rate">cash rate</a> to speed up or slow down the economy to try and keep inflation within a target band.</p>
<p>The cash rate is the average rate banks pay to lend to each other overnight. </p>
<p>Careful readers will have noted that it is the banks themselves, rather than solely the Reserve Bank, that determine the rate, although the Reserve Bank administers the system though which the trades are made.</p>
<p>That’s why the Reserve Bank’s <a href="https://www.rba.gov.au/media-releases/1990/mr-90-12.html">early announcements</a> about moving the cash rate initially used words such as </p>
<blockquote>
<p>the Reserve Bank proposes to operate in the domestic money market this morning with a view to reducing cash rates</p>
</blockquote>
<p>By borrowing enough from or lending enough to the private banks, the Reserve Bank could almost always push the cash rate up or down to where it wanted it.</p>
<p>So successful was it in getting the cash rate where it wanted, and so successful did the banks know it could be, that after a while it didn’t need to trade in the market to do it. </p>
<p>It merely had to announce where the cash rate would be, eventually dropping words about “operating in the money market” and simply saying <a href="https://www.rba.gov.au/media-releases/2007/mr-07-20.html">things like</a></p>
<blockquote>
<p>the board decided to increase the cash rate by 25 basis points</p>
</blockquote>
<p>A “<a href="https://www.investopedia.com/terms/b/basispoint.asp">basis point</a>” is one hundredth of one per cent, meaning 25 basis points is 0.25 percentage points.</p>
<p>Australia’s Reserve Bank adopted an inflation target of <a href="https://www.rba.gov.au/inflation/inflation-target.html">2-3%</a>, “on average, over time”. Other central banks adopted different targets. New Zealand’s target was originally <a href="https://www.rbnz.govt.nz/research-and-publications/speeches/2018/speech2018-04-12">0-2%</a> and was later lifted to 1-3%. The United States, United Kingdom, European Union and Japan target <a href="https://qz.com/2022696/where-did-the-feds-2-percent-inflation-target-come-from/">2%</a>. Canada targets <a href="https://www.bankofcanada.ca/core-functions/monetary-policy/">1-3%</a>.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/inflation-hits-5-1-how-long-until-mortgage-rates-climb-181832">Inflation hits 5.1%. How long until mortgage rates climb?</a>
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</em>
</p>
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<p>Regardless of the exact target, and regardless of the countless times it has been missed, inflation, and expectations of inflation, have stayed low ever since. </p>
<p>It mightn’t be because of the interest rate adjustments, and certainly isn’t only because of them. Other candidates include insecure employment, globalisation, growing inequality and cheap energy; but central bankers like to take the credit. </p>
<p>In 2004, Ben Bernanke, later to become Chair of the US Federal Reserve, spoke of a <a href="https://www.federalreserve.gov/boarddocs/speeches/2004/20040220/">Great Moderation</a> and said that in his opinion it wasn’t just luck, but the <a href="https://www.federalreservehistory.org/essays/great-moderation">skill</a> of modern central bankers that had brought it about. They had finally cracked it!</p>
<h2>Inflation tamed, til it wasn’t</h2>
<p>You have probably heard than the last time Australian interest rates were hiked during an election campaign was in <a href="https://www.smh.com.au/politics/federal/one-is-not-like-the-other-rba-not-re-living-2007-campaign-rise-20220428-p5agrv.html">2007</a>, when the cash rate was lifted to what now seems a dizzyingly high 6.75%. </p>
<p>What you might not have heard is that two years later it was half that level, because of the 2008 global financial crisis, which had been around the corner during the election when the rate was hiked.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/whats-in-the-cpi-and-what-does-it-actually-measure-165162">What's in the CPI and what does it actually measure?</a>
</strong>
</em>
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<p>It turned out the central bankers hadn’t cracked it. They had ignored an enormous build-up in private debt and <a href="https://www.thebalance.com/what-caused-2008-global-financial-crisis-3306176">increasingly risky financial behaviour</a>.</p>
<p>For much of the time since, inflation rates have been well below central bank targets, and official interest rates have been going <a href="https://youtu.be/d1gYJDQXPOk">down, down, deeper and down</a>. </p>
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<p>The Reserve Bank’s cash rate target hit a record low of <a href="https://www.rba.gov.au/statistics/cash-rate/">0.1%</a> during the pandemic.</p>
<p>But the flood of money the Reserve Bank pushed out the door by buying <a href="https://theconversation.com/5-ways-the-reserve-bank-is-going-to-bat-for-australia-like-never-before-149311">government bonds</a> and lending to banks for <a href="https://www.rba.gov.au/speeches/2020/sp-gov-2020-03-19.html">next to nothing</a> pushed the actual overnight cash rate down even lower, beneath 0.1%, to close to zero.</p>
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<p>Official rates in Europe and elsewhere had been negative before the pandemic. </p>
<p>In much of the rest of the world what Australians call the global financial crisis was called the “<a href="https://www.federalreservehistory.org/essays/great-recession-of-200709">great recession</a>”, and central bankers threw everything they could at trying to restore inflation after it was over.</p>
<p>They failed, just as Australia’s central bank failed to restore inflation. When COVID struck, inflation had been below the bottom of the Reserve Bank target band for almost all of the previous half decade.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/dont-look-up-has-a-lot-to-say-about-economics-much-of-it-useful-174399">Don't look Up! has a lot to say about economics, much of it useful</a>
</strong>
</em>
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<p>This wouldn’t have been a surprise to the iconic 20th-century economist John Maynard Keynes, who is said to have once compared trying to boost an ailing economy by cutting interest rates to “<a href="https://www.investopedia.com/terms/p/push_on_a_string.asp">pushing on a string</a>”. </p>
<p>Cutting rates can’t force unwilling businesses and consumers to invest and spend.</p>
<p>What it should tell us is that the relationship between the cash rate and inflation is more complex that the central bankers told us (and themselves) it was. Hiking interest rates far enough will almost certainly bring inflation down, but at a cost. </p>
<h2>Rate hikes can be counterproductive</h2>
<p>Small increases in interest rates can actually push prices up. Interest rates are a cost to businesses (and to landlords) and can be passed on in prices.</p>
<p>And while pushing up rates reduces the disposable income of those with mortgages to repay (putting downward pressure on spending and prices) it raises the spending power of people such as myself, with savings in term deposits, boosting our ability to spend and push up prices. </p>
<p>Higher interest rates are often thought to discourage business investment, but there is little evidence they do. Investments are driven more by expected sales than the cost of finance.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/there-are-4-economic-wildcards-between-now-and-election-day-the-first-is-this-week-181839">There are 4 economic wildcards between now and election day. The first is this week</a>
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</em>
</p>
<hr>
<p>What would bring inflation down would be a series of interest rate hikes so big it crashed property and share market prices, or so big it pushed people out of work and brought on a recession.</p>
<p>So the central bank pack ought to tread carefully. If inflation is driven by fossil fuel prices, supply chain disruptions, wars and (looking ahead) climate change, then showing restraint, and addressing the causes of these issues or waiting for them to pass might be a better response than pushing up rates, albeit not one in the central bank tool box. </p>
<h2>The best bands don’t play solo</h2>
<p>If it genuinely is excessive spending that is pushing up prices, the best tool to address that is <a href="https://www.investopedia.com/insights/what-is-fiscal-policy/">fiscal</a>, through budget measures that withdraw spending from the economy or push up taxes. </p>
<p>The March budget did the opposite, handing out a $250 <a href="https://www.abc.net.au/news/2022-03-28/federal-budget-2022-centrepiece-cost-of-living-package/100946148">cost of living bonus</a>.</p>
<p>And we ought not forget that central banks and regulators have another tool they can use, which is to tighten the amount of credit by limiting how much financial institutions can lend. Higher interest rates are one of the instruments in the band, but not the only one.</p>
<p>Bands sound better when they are made up of several players, playing several instruments. If you are performing solo, you need to be extremely good.</p><img src="https://counter.theconversation.com/content/181465/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steven Hail does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The best way to manage the economy is though an array of tools. Interest rates are just one.Steven Hail, Adjunct Associate Professor, Torrens University AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1818322022-04-27T06:35:41Z2022-04-27T06:35:41ZInflation hits 5.1%. How long until mortgage rates climb?<figure><img src="https://images.theconversation.com/files/459964/original/file-20220427-19-ncf90b.png?ixlib=rb-1.1.0&rect=760%2C431%2C1940%2C1048&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock/ABS</span></span></figcaption></figure><p>Australian consumer prices jumped an extraordinary 2.1% in the first three months of the year, the biggest quarterly jump since the introduction of the 10% goods and services tax at the start of the century.</p>
<p>The outsized increase, together with a larger than normal increase in the months to December, pushed Australia’s annual inflation rate way above the Reserve Bank’s 2-3% target to <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release">5.1%</a> – the biggest annual inflation rate for two decades. </p>
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<p>Petrol prices rose to a record high. The Bureau of Statistics says averaged unleaded petrol averaged A$1.83 per litre in the March quarter. </p>
<p>The annual increase, 35.1%, was the biggest since Iraq’s invasion of Kuwait in 1990.</p>
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<p>New dwelling prices rose due to shortages of labour and materials, and fewer government grants. Fresh food prices have increased due to floods. </p>
<p>Home prices, sometimes erroneously thought to be excluded from the consumer price index, surged 13.7% over the year, the most since the start of the GST.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/whats-in-the-cpi-and-what-does-it-actually-measure-165162">What's in the CPI and what does it actually measure?</a>
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<p>The increase tracks the cost of buying a new dwelling by an owner occupier, and reflects what the Bureau describes as high levels of building activity combined with ongoing shortages of materials and labour.</p>
<p>While the cost of housing is included in the consumer price index, the cost of land is not, being treated as an investment rather than a consumer good.</p>
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<p>To get a better idea of what would be happening were it not for these unusual and outsized moves, the Bureau of Statistics calculates what it calls a “<a href="https://www.rba.gov.au/education/resources/explainers/inflation-and-its-measurement.html">trimmed mean</a>” measure of underlying inflation.</p>
<p>The trimmed mean excludes the 15% of prices that climbed the most in the quarter and the 15% of prices that climbed the least or fell.</p>
<p>This underlying measure, closely watched by the Reserve Bank, climbed 3.7% – the first time it has climbed beyond the bank’s 2-3% target range since 2010. </p>
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<hr>
<p>Many people don’t believe the official inflation figures. They say they are too low (although interestingly this time, the <a href="https://www.forexfactory.com/news/1150662-australia-inflation-expectations-melbourne-institutes-april-survey-52">5.2%</a> estimate in the Melbourne Institute’s April consumer survey matched reality). </p>
<p>In part this is because people tend to notice the prices that have jumped. Petrol prices are particularly visible. People tend not to notice the many other prices, including rents in some parts of Australia, that have been falling.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/as-petrol-prices-rise-will-carbon-emissions-come-down-178024">As petrol prices rise, will carbon emissions come down?</a>
</strong>
</em>
</p>
<hr>
<p>And in part it is because movements in the consumer price index are an average.</p>
<p>The price of the bundle of goods and services used by around half the households would have gone up by more than 5.1%, and the price of the bundle used by the other half by less than 5.1%. The households facing the increases notice it more. </p>
<p>Over the past ten years the price of clothing has fallen 6%, and the price of communications services 23%. The price of health services has climbed 40%</p>
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<p>Looking ahead, inflation is likely to drop in the June quarter. Oil prices are <a href="https://tradingeconomics.com/commodity/crude-oil">falling</a>, and the budget petrol price relief will cut prices a further 22 cents a litre.</p>
<p>Some supply chain problems and skilled labour shortages caused by the pandemic are likely to ease. And the Australian dollar has climbed, which should push down the price of imports.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/despite-record-vacancies-australians-shouldnt-expect-big-pay-rises-soon-180416">Despite record vacancies, Australians shouldn't expect big pay rises soon</a>
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<p>Unless there is a significant pickup in wage growth (we find out in three weeks, <a href="https://theconversation.com/there-are-4-economic-wildcards-between-now-and-election-day-the-first-gets-played-this-week-181839">three days before the election</a>) inflation may start to come back down of its own accord, without the need for the Reserve Bank to push up rates.</p>
<p>But there are certainly alternative scenarios.</p>
<h2>Over to the Reserve Bank</h2>
<p>The response of the Reserve Bank to higher prices is not as automatic as often supposed. But with the RBA cash rate at an all-time low, and an increasing risk that the current inflation will become embedded in expectations, an increase in rates is a matter of “when” not “if”.</p>
<p>As Prime Minister John Howard and Treasurer Peter Costello discovered in the election they lost in 2007, the Reserve Bank won’t hold off on increasing interest rates just because an election is imminent. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-rba-has-lost-patience-on-rates-but-it-isnt-rushing-to-push-them-up-180681">The RBA has lost patience on rates, but it isn't rushing to push them up</a>
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<p>Asked if the bank would tighten rates if the evidence suggested it needed to near an election, the then governor said: “<a href="https://www.afr.com/policy/economy/rba-governor-glenn-stevens-full-exit-interview-20160907-graws7">of course we would, because we do our job</a>”.</p>
<p>After its April meeting the bank said it would wait for information before moving. </p>
<blockquote>
<p>over coming months, important additional evidence will be available on both inflation and the evolution of labour costs. Consistent with its announced framework, the board agreed that it would be appropriate to assess this evidence</p>
</blockquote>
<p>The labour cost (wage) data are released on May 18, meaning the first increase in interest rates may well not be until after the election, at the board’s June 7 meeting. If the wages data show no acceleration, it might be later.</p>
<h2>How high for mortgage interest rates?</h2>
<p>The Reserve Bank generally tries to move the “<a href="https://www.rba.gov.au/statistics/cash-rate/">cash rate</a>” (the interest rate on overnight loans) in steps of 0.25 percentage points. But, unusually, the current target is 0.10%. So it might first move 15 points to 0.25%. </p>
<p>If it wants to send a stronger signal, it will move 40 points to 0.50%. Banks are generally not shy about passing these changes on.</p>
<p>If the Reserve Bank hikes more than once, mortgage interest rates might climb from their present range of 3-3.5% to 4-5% over the course of the year.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/there-are-4-economic-wildcards-between-now-and-election-day-the-first-is-this-week-181839">There are 4 economic wildcards between now and election day. The first is this week</a>
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<p>But the Reserve Bank will not push interest rates as high as it did during <a href="https://www.rba.gov.au/statistics/cash-rate/">previous</a> tightening cycles. Households have <a href="https://www.rba.gov.au/publications/rdp/2020/pdf/rdp2020-05.pdf">more debt</a>, meaning that a rate increase of any given size has more impact than it once would have.</p>
<p>It’s hard to know where a series of rate rises would end, but it’s a fair bet the cash rate will end up higher than the Reserve Bank’s 2-3% inflation target, making the real interest rate positive (above inflation).</p>
<p>Banks are required to assure themselves that borrowers could meet repayments if rates rose by <a href="https://www.rba.gov.au/publications/fsr/2021/oct/mortgage-macroprudential-policies.html">three percentage points</a>, which is just as well. </p>
<h2>Who will be hurt?</h2>
<p>About a third of households have a mortgage, and face higher payments. </p>
<p>But it will take a while for all of them to be affected. Around 40% of borrowers have “<a href="https://www.rba.gov.au/publications/fsr/2022/apr/household-business-finances.html">fixed-rate”</a> loans where the interest rate is only adjusted every three years. </p>
<p>And according to the Reserve Bank, typical borrowers are currently <a href="https://www.rba.gov.au/speeches/2022/sp-gov-2022-03-22-q-and-a-transcript.html">two years </a> ahead on repayments, which suggests most will be able to cope.</p><img src="https://counter.theconversation.com/content/181832/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Hawkins is a former economic forecaster in the Reserve Bank and Australian Treasury.</span></em></p>Inflation is well outside the Reserve Bank’s target band and higher than it has been for two decades.John Hawkins, Senior Lecturer, Canberra School of Politics, Economics and Society and NATSEM, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1806812022-04-06T03:40:50Z2022-04-06T03:40:50ZThe RBA has lost patience on rates, but it isn’t rushing to push them up<figure><img src="https://images.theconversation.com/files/456494/original/file-20220406-22-ogrbu2.png?ixlib=rb-1.1.0&rect=5%2C353%2C3898%2C1808&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">shutterstock</span></span></figcaption></figure><p>It is coming up to <a href="https://www.rba.gov.au/media-releases/2020/mr-20-28.html">18 months</a> since Australia’s Reserve Bank last cut its cash rate. </p>
<p>And what it did then was merely a further cut, from an unprecedented low of 0.25% to a fresh unprecedented low of 0.10%</p>
<p>Since it last changed the direction of rates (started cutting instead of hiking) it has been <a href="https://www.rba.gov.au/media-releases/2011/mr-11-24.html">10 years and five months</a>.</p>
<p>Which is why it has been telling anyone who asked (and repeatedly using the phrase in its official communications) that it is “<a href="https://www.rba.gov.au/media-releases/2021/mr-21-24.html">prepared to be patient</a>” before changing again. It wants to be sure conditions necessitate such a move.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/456503/original/file-20220406-23-rvmp7m.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/456503/original/file-20220406-23-rvmp7m.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/456503/original/file-20220406-23-rvmp7m.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=286&fit=crop&dpr=1 600w, https://images.theconversation.com/files/456503/original/file-20220406-23-rvmp7m.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=286&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/456503/original/file-20220406-23-rvmp7m.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=286&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/456503/original/file-20220406-23-rvmp7m.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=360&fit=crop&dpr=1 754w, https://images.theconversation.com/files/456503/original/file-20220406-23-rvmp7m.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=360&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/456503/original/file-20220406-23-rvmp7m.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=360&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://datawrapper.dwcdn.net/4MG8z/1/">The Reserve Bank's usual wording</a></span>
</figcaption>
</figure>
<p>On Tuesday, in the statement released after the board’s April meeting, the words “prepared to be patient” were <a href="https://www.rba.gov.au/media-releases/2022/mr-22-11.html">missing</a>.</p>
<p>The board has literally lost its patience.</p>
<p>Instead of saying it was prepared to be patient “as it monitors how the various factors affecting inflation in Australia evolve”, it said </p>
<blockquote>
<p>Over coming months, important additional evidence will be available to the board on both inflation and the evolution of labour costs.</p>
</blockquote>
<p>The clear message (and the words in Reserve Bank statements are chosen very carefully) is that if the bank doesn’t like what it sees on inflation and wage costs over the coming few months, it’ll jack up rates, for the first time in a decade.</p>
<h2>Prices, and wages</h2>
<p>So what is it waiting for? </p>
<p>The first is the March quarter inflation results which will be published by the Australian Bureau of Statistics in three weeks on <a href="https://www.abs.gov.au/ausstats/abs@.nsf/webpages/abs+release+calendar">April 27</a> during the middle of the election campaign. </p>
<p>Economists expect headline inflation to be quite high, up from the latest 3.5% </p>
<hr>
<p><iframe id="4MG8z" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/4MG8z/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>So-called underlying inflation, which filters out unusual price moves, and is what the Reserve Bank actually targets, might not climb as high.</p>
<p>But even if it does, there’s every chance it won’t overly alarm the bank. </p>
<p>This is because the first three months of March were filled with temporary, one-off <a href="https://theconversation.com/why-australias-reserve-bank-wont-hike-interest-rates-just-yet-179633">external</a> shocks to the economy such as the increase in petrol prices and price the impact on supply chains of lockdowns in major Chinese cities. </p>
<hr>
<p><iframe id="a9g08" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/a9g08/3/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>Conceivably these one-off effects could dissipate after a few months. We were already seeing petrol prices fall before last week’s cut in petrol excise. </p>
<p>Many related price increases might fade away shortly after they arrive, making an increase in rates to restrain prices unnecessary.</p>
<p>For inflation to be sustainably within its 2-3% target band the Reserve Bank says it wants to see an increase in <a href="https://www.rba.gov.au/speeches/2022/sp-gov-2022-03-11-q-and-a-transcript.html">wages growth</a> as well. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-australias-reserve-bank-wont-hike-interest-rates-just-yet-179633">Why Australia's Reserve Bank won't hike interest rates just yet</a>
</strong>
</em>
</p>
<hr>
<p>Wages are one of the main business costs meaning it is unlikely we will see long-lasting higher price inflation until we have higher wage inflation.</p>
<p>This is why even though the board will have digested the inflation report by its next meeting on May 3 (just ahead of the election) it may well wait until June when it can see the latest wage figures as well.</p>
<h2>How high, how soon</h2>
<p>If the bank does start raising rates in June, where will it stop? </p>
<p>Market pricing currently predicts the cash rate will jump from 0.10% to 2% by the end of the year, and to more than 3% by next year. They imply an average of one rate hike at every Reserve Bank board meeting for the next 18 months.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/456506/original/file-20220406-12-drai3k.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/456506/original/file-20220406-12-drai3k.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/456506/original/file-20220406-12-drai3k.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=332&fit=crop&dpr=1 600w, https://images.theconversation.com/files/456506/original/file-20220406-12-drai3k.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=332&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/456506/original/file-20220406-12-drai3k.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=332&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/456506/original/file-20220406-12-drai3k.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=418&fit=crop&dpr=1 754w, https://images.theconversation.com/files/456506/original/file-20220406-12-drai3k.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=418&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/456506/original/file-20220406-12-drai3k.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=418&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.asx.com.au/data/trt/ib_expectation_curve_graph.pdf">Australian Securities Exchange</a></span>
</figcaption>
</figure>
<p>This is probably an upper bound for what we can expect. Market economists (the people who advise traders) as opposed to market traders expect the bank to hike no more than a handful of times in the second half of this year.</p>
<p>While jobs growth is strong, with underemployment at its lowest in a decade and unemployment close to its lowest in five decades, the bank will be cautious about slowing the recovery before it delivers widespread higher wage growth.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/despite-record-vacancies-australians-shouldnt-expect-big-pay-rises-soon-180416">Despite record vacancies, Australians shouldn't expect big pay rises soon</a>
</strong>
</em>
</p>
<hr>
<p>This raises the question of why interest rates are tipped to remain so low when unemployment is approaching its lowest level in half a century. </p>
<p>It is partly because high household debt means any increase in rates will have a much larger impact on household budgets and spending than it would have.</p>
<p>Interest rates won’t stay close to zero forever. But it will be a long time before they are back to the high levels of 4%+ last seen when the bank began cutting in 2010.</p><img src="https://counter.theconversation.com/content/180681/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Isaac Gross does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Australia’s Reserve Bank no longer says it is patient, but it is unlikely to move move until it sees widespread higher wage growth.Isaac Gross, Lecturer in Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1799602022-04-04T19:58:19Z2022-04-04T19:58:19ZFixed or variable? The choice of mortgage isn’t as simple as it seems<figure><img src="https://images.theconversation.com/files/454554/original/file-20220327-17-1qgqy6h.jpg?ixlib=rb-1.1.0&rect=1029%2C131%2C6395%2C3185&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>In times like these, when there is great uncertainty about what will happen to interest rates, borrowers get lots of advice about whether to go fixed or variable. Unfortunately, a lot of it is not well founded.</p>
<p>For example, anyone who tells you to lock a fixed rate mortgage now before rates rise, is basically talking rubbish. </p>
<p>The idea it would necessarily result in you paying less interest over the life of the loan is wrong.</p>
<p>With minor exceptions, banks set their fixed rates based on their expectations of future changes in interest rates. They have armies of economists and analysts factoring all available information to do the calculations.</p>
<p>If they expect general rates to climb, they will set their fixed rates correspondingly higher than their variable rates. If they expect rates to fall, they will set them correspondingly lower.</p>
<p>It’s how the rates they pay are set too. When banks borrow at fixed rates, those are usually based on expectations of future movements in interest rates.</p>
<h2>It’s hard to beat the bank</h2>
<p>It means that the bank’s expectation of what it will get from a customer over the life of a fixed loan ends up close to its expectation of what it will get from a customer over the life of a variable loan. It gets the same sort of profit either way.</p>
<p>Of course, as a customer you might disagree with the bank’s expectation of future interest rate movements. You might want to back your judgement. </p>
<p>Good luck with it, but I’m not at all sure the typical borrower has the information and analytical skills needed to work these things out better than the typical bank.</p>
<p>It is true that even the banks can (and sometimes do) get it wrong. The future is rarely what has been predicted. But banks are generally less likely to get it wrong than their customers. </p>
<h2>Fixed loans can produce nasty surprises too</h2>
<p>For borrowers considering whether to go fixed or variable, there are other things to consider. For fixed loans, the monthly payments are locked in for a set number of years. For many that’s a good thing. They know for certain that (over the period the loan is fixed) their payments won’t climb beyond what they expect to pay.</p>
<p>But there’s a danger. When the fixed term expires, what they are charged might jump by quite a lot, as happened in the <a href="https://www.rba.gov.au/speeches/2009/sp-so-150409.html">United States</a> in the leadup to the global financial crisis.</p>
<p>If one bank offers fixed rate loans at a lower margin over its floating rate than does other banks, that may be a case for choosing its fixed rate loan over that of its competitors (if for other reasons you were minded to take out a fixed-rate loan).</p>
<p>But the difference might also reflect a host of other explicit and implicit charges the borrower needs to be aware of. And some banks might be setting rates aimed at exploiting borrowers biased towards one or the other type of loan.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-rba-signals-the-end-of-ultra-cheap-money-heres-what-it-will-mean-170928">The RBA signals the end of ultra-cheap money. Here's what it will mean</a>
</strong>
</em>
</p>
<hr>
<p>Some small banks might also offer different packages of rates because of a wish to induce borrowers into either fixed or floating rate loans to better reflect characteristics of their funding mix. </p>
<p>But for banks of any substantial size, this is highly unlikely. They are able to use wholesale and derivative markets to manage any interest rate risk from mismatch between assets and liabilities.</p>
<p>The message is to beware of any advice that suggests either fixed or floating is a better deal. Consider what matters for you. Your ability to deal with the risk of changes in your repayment obligations is likely to be more important.</p><img src="https://counter.theconversation.com/content/179960/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kevin Davis does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Beware any advice to go either fixed or variable. You are unlikely to outsmart the bank.Kevin Davis, Emeritus Professor of Finance, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1750542022-01-30T01:42:56Z2022-01-30T01:42:56ZTop economists expect RBA to hold rates low in 2022 as real wages fall<figure><img src="https://images.theconversation.com/files/443112/original/file-20220128-15-11po5ja.png?ixlib=rb-1.1.0&rect=233%2C0%2C3473%2C2000&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Wes Mountain/The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span></figcaption></figure><p>Australia’s leading forecasters expect the Reserve Bank to resist pressure to lift interest rates all year, despite rising interest rates overseas, much higher inflation, plunging unemployment, and financial market traders pricing in two hikes in the next six months.</p>
<p>The 24-person forecasting panel assembled by The Conversation also predicts:</p>
<ul>
<li>weaker economic growth</li>
<li>much lower housing price growth<br></li>
<li>next to no growth in the Australian share market<br></li>
<li>little or no further inroads into unemployment</li>
<li>and wage growth so weak that real wages go backwards. </li>
</ul>
<p>Two-thirds of the <a href="https://theconversation.com/au/topics/conversation-economic-survey-81354">forecasting panel</a> expect the Reserve Bank to leave rates ultra low until at least the first quarter of 2023, when it will have a better read on price pressure, wages and the jobs market.</p>
<p>Investors are banking on a different outcome. </p>
<p>Ahead of the Reserve Bank board’s first meeting for the year <a href="https://www.rba.gov.au/">on Tuesday</a>, securities exchange trading is pricing in an increase in the Reserve Bank’s cash rate from its historic low of 0.10% to 0.25% by <a href="https://www.asx.com.au/data/trt/ib_expectation_curve_graph.pdf">June</a>, followed by an increase to 0.5% by August, and two further increases to 1.0% by Christmas.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/top-economists-see-no-prolonged-high-inflation-no-rate-hike-in-2022-171731">Top economists see no prolonged high inflation, no rate hike in 2022</a>
</strong>
</em>
</p>
<hr>
<p>If that happened, it would leave mortgage rates higher than they were before COVID and before two years of ultra-low interest rates pushed up home prices 25%.</p>
<p>The <a href="https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2021/december-2021">Bank of England</a> increased its cash rate from 0.1% to 0.25% in December and the <a href="https://www.rbnz.govt.nz/monetary-policy/official-cash-rate-decisions">Reserve Bank of New Zealand</a> lifted its cash rate in October and November to 0.75%. A 40-year high in inflation is expected to force the <a href="https://www.theguardian.com/business/2022/jan/26/us-federal-reserve-rise-interest-inflation">US Federal Reserve</a> to lift rates in March.</p>
<p>But China has moved in the other direction, cutting rates and imploring the rest of the world not to “<a href="https://www.afr.com/world/asia/don-t-raise-interest-rates-china-s-xi-tells-the-west-20220118-p59p05">slam on the brakes</a>”.</p>
<h2>On balance, no rate hike all year</h2>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/442376/original/file-20220124-23-1f7rjsi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/442376/original/file-20220124-23-1f7rjsi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/442376/original/file-20220124-23-1f7rjsi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=971&fit=crop&dpr=1 600w, https://images.theconversation.com/files/442376/original/file-20220124-23-1f7rjsi.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=971&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/442376/original/file-20220124-23-1f7rjsi.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=971&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/442376/original/file-20220124-23-1f7rjsi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1220&fit=crop&dpr=1 754w, https://images.theconversation.com/files/442376/original/file-20220124-23-1f7rjsi.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1220&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/442376/original/file-20220124-23-1f7rjsi.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1220&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Reserve Bank Governor Philip Lowe addresses the National Press Club on Wednesday.</span>
<span class="attribution"><span class="source">Lukas Coch/AAP</span></span>
</figcaption>
</figure>
<p>Now in its <a href="https://theconversation.com/au/topics/conversation-economic-survey-81354">fourth year</a>, the Conversation survey taps the expertise of leading forecasters in 18 universities and financial institutions, among them economic modellers, former Treasury, OECD and Reserve Bank officials, and a former member of the Reserve Bank board. The panel was surveyed on January 20.</p>
<p>Eight of the panellists predict the Reserve Bank will begin lifting its cash rate this year. One, former OECD official Adrian Blundell-Wignall, expects the bank to begin lifting in March, ahead of the federal election. </p>
<p>But the bulk of those surveyed point to the bank’s target of achieving average inflation “<a href="https://www.rba.gov.au/speeches/2021/sp-gov-2021-07-08.html">sustainably within</a>” its target band of 2-3% over time, noting that inflation has been well below that band for most of the past five years.</p>
<p>Governor Philip Lowe will outline his thinking after the first Reserve Bank board meeting of the year in an address to the <a href="https://www.npc.org.au/speaker/2022/944-philip-lowe">National Press Club</a> on Wednesday.<br>
The panel expects him to suggest he will need to see more than a short-lived burst of higher inflation before he lifts rates.</p>
<p>The panel’s median (middle) forecast is for rate hikes to begin in April 2023. Three panellists, including Peter Tulip, a former research manager at the bank, expect no increase before February 2024.</p>
<hr>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/441900/original/file-20220121-8990-qxit6g.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/441900/original/file-20220121-8990-qxit6g.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=779&fit=crop&dpr=1 600w, https://images.theconversation.com/files/441900/original/file-20220121-8990-qxit6g.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=779&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/441900/original/file-20220121-8990-qxit6g.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=779&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/441900/original/file-20220121-8990-qxit6g.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=979&fit=crop&dpr=1 754w, https://images.theconversation.com/files/441900/original/file-20220121-8990-qxit6g.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=979&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/441900/original/file-20220121-8990-qxit6g.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=979&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<hr>
<h2>Inflation not yet a problem</h2>
<p>Although inflation has jumped to a four-decade high of 7% in the United States, and although Australia’s headline inflation rate has hit 3.5%, the so-called “<a href="https://www.rba.gov.au/publications/bulletin/2010/mar/2.html">underlying inflation rate</a>” targeted by the Reserve Bank hasn’t yet reached the top of the bank’s 2-3% target band.</p>
<p>The panel’s average forecast is that it won’t reach it in 2022 or 2023, and that it will decline in 2023.</p>
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<h2>Real wages shrinking</h2>
<p>But inflation is expected to be high enough to send real wages backwards, perhaps for two consecutive years – a first in the 25-year history of the wage price index.</p>
<p>In 2022 the panel’s average forecast is for wages growth of just 2.7% in the face of underlying inflation of 2.9%, pushing down real wages (buying power) 0.2%.</p>
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<p>The panel expects wages growth to remain no higher than prices growth in the year that follows, despite historically low unemployment and labour shortages.</p>
<p>In 2023 it expects wages growth to do no better than underlying inflation at 2.8%.</p>
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<h2>GDP growth sinking</h2>
<p>Economic growth is expected to sink. The panel expects the December 2021 bounce out of state lockdowns to be reported on March 2 to be followed by a March quarter impacted by something akin to “voluntary lockdowns”, as Australians restrict movements in response to Omicron.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-you-might-feel-anxious-after-lockdown-and-how-to-cope-169089">Why you might feel anxious after lockdown -- and how to cope</a>
</strong>
</em>
</p>
<hr>
<p>Even as immigration and freedom of movement return, the panel expects economic growth to sink back towards 2.5%, which is roughly where it was before COVID and well below the 3-4% common in the 1990s and early 2000s.</p>
<p>Panellists pointed to “increasing social and political discord” and weaker demand from China, along with the “absence of any policies designed to lift productivity growth above dismal pre-COVID rates” as drags on growth, and identified government spending as one of the few supports.</p>
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<p>The panel expects China’s economic growth to sink below US economic growth for the first time since the 1970s.</p>
<p>Mei Dong of the University of Melbourne said Chinese growth would suffer from a shrinking working-age population growth, declining employment participation, markedly slower productivity growth and a decision by Chinese authorities to de-emphasise GDP growth as an objective. </p>
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<h2>Spending held back</h2>
<p>The broadest measure of overall living standards, real net national disposable income per capita, is expected to climb more strongly than real wages in 2022, reflecting growth in other sources of income including company profits.</p>
<p>Consumer spending is expected to grow by a healthy 3.7% in real terms, although by nowhere near as much as it would if the boost in saving during the COVID pandemic was fully unwound.</p>
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<p>Household saving soared to an unprecedented 23.6% of income in mid-2020 amid concern about COVID, plunged down to a still-elevated 11.8% in mid 2021 after restrictions eased, and then soared again to 19.8% as Delta took hold. </p>
<p>The ratio is expected to remain at an elevated 12% throughout 2022, well above the few per cent common in the decades leading up to COVID, as households hang onto rather than spend income, uncertain about the future.</p>
<p>In December, Treasurer Josh Frydenberg spoke about the unusually high saving rate as a source of future spending, saying it was “a lot of damn money that’s been accumulated”. The panel’s forecasts suggest that accumulation will continue.</p>
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<p>The panel expects non-mining business investment to grow strongly throughout 2022, although in response to budget measures rather than what economist Stephen Anthony describes as structural drivers moving in the other direction.</p>
<p>Panellist Mark Crosby says investment should slow towards the end of 2022 as the prospect of higher interest rates dents the construction industry.</p>
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<h2>Unemployment with a ‘4’, but not a ‘3’</h2>
<p>Few of the panellists expect Australia’s unemployment rate to fall much below its present <a href="https://www.abs.gov.au/media-centre/media-releases/employment-65000-unemployment-rate-falls-42">4.2%</a> in the two years ahead, despite what former ANZ economist Warren Hogan describes as the strongest labour demand Australia has ever seen.</p>
<p>He says the problem is the skills employers are looking for don’t match those of job-seekers and the workers likely to become available in the years ahead. </p>
<p>Janine Dixon says businesses are putting more people on their payrolls to cover sick leave and isolation leave, making it likely there has been an increase in underemployment.</p>
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<p>In releasing the December budget update, Treasurer Frydenberg forecast “the addition of around one million jobs” between October 2021 and mid-2025.</p>
<p>It’s a projection broadly endorsed by the panel, although mainly because they believe that’s what population growth is likely to deliver.</p>
<p>Mark Crosby described it as a “pretty ordinary outcome given the rate of jobs growth seen prior to the pandemic”. Much would depend on migration. The more migrants, the more extra jobs. </p>
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<h2>Weaker home price growth</h2>
<p>After a year in which national housing prices soared <a href="https://www.corelogic.com.au/news/housing-values-end-year-221-higher-pace-gains-continuing-soften-multi-speed-conditions-emerge">22%</a>, the panel is expecting more sedate growth of 6.5% in Sydney and 6.1% in Melbourne.</p>
<p>Katrina Ell of Moody’s Analytics believes the market has already peaked. She says mortgage rates will creep higher this year regardless of whether the Reserve Bank lifts official rates, and measures put in place by the Prudential Regulation Authority are starting to cramp investor interest.</p>
<p>Warren Hogan disagrees, seeing investors driving the next phase of the housing market. He says cashed-up upper middle to high income households will try to protect their wealth against rising inflation by buying real estate.</p>
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<h2>Subdued markets</h2>
<p>In aggregate, the panel expects the exchange rate to stay broadly where it is at 71 to 72 US cents in 2022, and expects the ASX200 share price index to end the year about where it began, after climbing 13% in 2021 and sinking 6% in January. </p>
<p>They expect the iron ore price to fall from US$137 per tonne to US$98.</p>
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<p><em>The panel:</em></p>
<p><iframe id="tc-infographic-628" class="tc-infographic" height="400px" src="https://cdn.theconversation.com/infographics/628/9a20218fd520d7328a3b922b9b1c497e61f6e947/site/index.html" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p><a href="https://docs.google.com/spreadsheets/d/1Lv3SpLMZ0BwvOMPoI-CcYurMqXsx1bsgiYW4IuJuWHA/edit#gid=0">Results spreadsheet</a>, <a href="https://cdn.theconversation.com/static_files/files/1952/2022_Forecasting_Survey_-_Raw_Data.pdf">pdf</a></p>
<p><em>This Conversation survey is the first not to include the views of Griffith University professor and former IMF and Treasury official Tony Makin who passed away suddenly in November, aged 66. His contributions were greatly valued.</em></p><img src="https://counter.theconversation.com/content/175054/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Conversation’s expert panel predicts prices will rise faster than Australians’ pay can keep up in 2022 – and that’s not their only concern about the local economy.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1717312021-11-15T04:34:45Z2021-11-15T04:34:45ZTop economists see no prolonged high inflation, no rate hike in 2022<figure><img src="https://images.theconversation.com/files/431893/original/file-20211115-17-jd48oh.png?ixlib=rb-1.1.0&rect=149%2C0%2C3658%2C2000&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Wes Mountain/The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span></figcaption></figure><p>Despite appearances – especially in the United States – the era of high inflation isn’t set for a comeback in the view of Australia’s leading economists, and most see no need for the Reserve Bank to lift interest rates next year.</p>
<p>In the US, figures released last week showed the consumer price index surged 6.2% in the year to October, the most since 1990. So-called “core” inflation (which excludes volatile prices) climbed 4.6%, also the most for 30 years.</p>
<hr>
<p><strong>US underlying inflation</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/431841/original/file-20211114-27-ncun3x.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/431841/original/file-20211114-27-ncun3x.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/431841/original/file-20211114-27-ncun3x.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=247&fit=crop&dpr=1 600w, https://images.theconversation.com/files/431841/original/file-20211114-27-ncun3x.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=247&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/431841/original/file-20211114-27-ncun3x.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=247&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/431841/original/file-20211114-27-ncun3x.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=310&fit=crop&dpr=1 754w, https://images.theconversation.com/files/431841/original/file-20211114-27-ncun3x.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=310&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/431841/original/file-20211114-27-ncun3x.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=310&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">US consumer price index for all urban consumers, all items less food and energy, city average.</span>
<span class="attribution"><a class="source" href="https://fred.stlouisfed.org/graph/?g=rocU">US Bureau of Labor Statistics, St Louis Fed</a></span>
</figcaption>
</figure>
<hr>
<p>Former US treasury secretary Larry Summers is talking about a jump to <a href="https://www.afr.com/world/north-america/containing-inflation-will-be-difficult-larry-summers-20211111-p597zk">11%</a> as over-heating becomes entrenched, necessitating rate hikes in the United States, Britain and Australia.</p>
<p>But the 55 leading Australian economists surveyed by the Economic Society of Australia and The Conversation this week aren’t buying it. They point out that Australia’s underlying inflation rate (while climbing) is much lower, at 2.1%.</p>
<hr>
<p><strong>US and Australian underlying inflation</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/431846/original/file-20211114-17-1mqluxo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/431846/original/file-20211114-17-1mqluxo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/431846/original/file-20211114-17-1mqluxo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=240&fit=crop&dpr=1 600w, https://images.theconversation.com/files/431846/original/file-20211114-17-1mqluxo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=240&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/431846/original/file-20211114-17-1mqluxo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=240&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/431846/original/file-20211114-17-1mqluxo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=301&fit=crop&dpr=1 754w, https://images.theconversation.com/files/431846/original/file-20211114-17-1mqluxo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=301&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/431846/original/file-20211114-17-1mqluxo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=301&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release">Australian Bureau of Statistics, US Bureau of Labor Statistics</a></span>
</figcaption>
</figure>
<hr>
<p>Whereas in the US wages climbed <a href="https://www.bls.gov/news.release/pdf/eci.pdf">4.6%</a> in the year to September, in Australia they climbed <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/wage-price-index-australia/latest-release">1.7%</a> in the year to June, an official figure that will be updated with readings from the September quarter on Wednesday.</p>
<p>32 of the 55 top economists surveyed by the Economic Society of Australia rejected the proposition that the current combination of Australian fiscal and monetary policy posed “a serious risk of prolonged above-target inflation”. </p>
<p>Only 12 supported it. When weighted by the confidence of respondents expressed on a scale of 1-10, backing for the proposition shrank from 22% to 20%.</p>
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<p>Independent economists Nicki Hutley and Saul Eslake said fiscal policy (government spending) was set to tighten as COVID spending programs expired, making projected high inflation unlikely. </p>
<p>Harry Bloch said the prices of Australian services were predominantly determined here, by Australian wage rates, which were held back by the bargaining strength of unions and government wage setting policies. </p>
<h2>Big inflation would require wage inflation</h2>
<p>Matthew Butlin, until this year South Australia’s Productivity Commissioner, said prices were rising quickly in asset markets such as those for land and shares.</p>
<p>“The pressure simply to recover the real value of wages, let alone increase their real value, will be significant,” he said. Australia risked a wage-price spiral. </p>
<p>Rana Roy foresaw temporary high inflation until high energy prices and supply chain disruptions passed, but “temporary” in the sense that the hyperinflation in Germany’s Weimar Republic was temporary, lasting from 1921 to 1923.</p>
<p>Suppressing the higher inflation would require deliberate corrective action.</p>
<h2>Higher rates, but not yet</h2>
<p>Asked when the Reserve Bank would next lift its cash rate to combat inflation, most nominated 2023. Only 15 of the 52 economists who answered the question expected a hike next year, putting the majority at odds with financial market pricing which backs in several hikes during 2022.</p>
<p>Reserve Bank Governor Philip Lowe said earlier this month he didn’t expect to have to lift the cash rate until 2024, a proposition backed by only 10 of the 52 economists who tackled the question.</p>
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<p>Most (33 of the 55) believed the Reserve Bank had managed the economy well during the past five years, effectively used the tools available to it to achieve its goals of maintaining the stability of the currency, ensuring full employment and furthering the “economic prosperity and welfare of the people of Australia”.</p>
<p>Only 15 believed the bank had managed things badly.</p>
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<p>Fabrizio Carmignani said it could be argued the bank had kept its cash rate too low for too long and also argued that it had failed to get inflation up to its target band, two apparently contradictory positions.</p>
<p>Paul Frijters said that by targeting the underlying inflation rate as calculated by the Bureau of Statistics, which excludes much of housing, the bank had “cooked the books” to avoid having to increase interest rates.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/whats-in-the-cpi-and-what-does-it-actually-measure-165162">What's in the CPI and what does it actually measure?</a>
</strong>
</em>
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<hr>
<p>John Quiggin said the bank should abandon its inflation target of 2-3% and instead target nominal GDP growth, doing whatever was needed to get the economy to grow at a nominal rate of 6-7%.</p>
<h2>No clear case for an inquiry</h2>
<p>The economists surveyed were divided about the need for an independent review of the Reserve Bank after next year’s election.</p>
<p>The Organisation for Economic Co-operation and Development and the International Monetary Fund have <a href="https://www.smh.com.au/politics/federal/the-world-has-changed-imf-backs-rba-inquiry-20210924-p58uka.html">backed</a> a review of the kind proposed by Labor, which would examine the bank’s mandate, board structure, and hiring and communication processes.</p>
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<p>Asked about the idea in the survey, former Labor minister Craig Emerson said the bank had consistently undershot the 2% lower bound of its inflation target, causing unnecessarily high unemployment and low wages growth in part because it had targeted projected rather than actual inflation, and its projections had fallen short.</p>
<p>In October last year Governor Philip Lowe announced the bank would switch to targeting <a href="https://www.rba.gov.au/speeches/2020/sp-gov-2020-10-15.html">actual inflation</a>, saying it would not be lifting its cash rate “until actual inflation is sustainably within the target range”.</p>
<p>Other panellists including Joaquin Vespignani argued that by targeting only measured inflation the bank had created “a bubble in the housing market which is not consistent with economic prosperity”. </p>
<h2>More economists on the RBA board</h2>
<p>Panellists including Ken Clements argued there was a case for appointing more board members with the economic expertise needed to challenge bank officials.</p>
<p>Former OECD official Adrian Blundell-Wignall argued the bank’s structure and goals were the broadly right ones. We should “not try to fix what isn’t broken”.</p>
<p>James Morley was concerned an independent commission of inquiry might be “highly politicised and lead to unrealistic expectations about what monetary policy can and should do”.</p>
<p>The Bank of Canada reviewed its performance and frameworks in cooperation with the federal government every <a href="https://www.reuters.com/article/us-canada-bank-wilkins-idCAKBN25M1U4">five years</a>, a practice that would work well in Australia.</p>
<hr>
<p><em>Detailed responses:</em></p>
<p><iframe id="tc-infographic-617" class="tc-infographic" height="400px" src="https://cdn.theconversation.com/infographics/617/4e6fbbe875d4df44e5e678d4f3ff79c5e41ed485/site/index.html" width="100%" style="border: none" frameborder="0"></iframe></p><img src="https://counter.theconversation.com/content/171731/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The 55 leading economists surveyed by the Economic Society see few signs of Australia aping the US, where inflation has surged to its highest level in 30 years.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1707162021-11-05T06:24:57Z2021-11-05T06:24:57ZRBA says it’s a W-shaped recovery, with housing one of the few concerns<figure><img src="https://images.theconversation.com/files/430451/original/file-20211105-21-1ma0xau.jpg?ixlib=rb-1.1.0&rect=631%2C151%2C1533%2C970&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">RBA/The Conversation</span></span></figcaption></figure><p>The Reserve Bank has used Friday’s quarterly assessment of the economy to declare that lockdowns have “<a href="https://www.rba.gov.au/publications/smp/2021/nov/">delayed but not derailed</a>” Australia’s recovery.</p>
<p>It says economic activity probably contracted 2.5% in the three months to September, but the December quarter (the one we are in now) will regain most of what was lost, leaving the economy recovering much as it would have were it not for the mid-year lockdowns.</p>
<p>Taken together with last year’s descent into recession and quick bounce back it paints a picture of a W-shaped recovery, even on what the Bank has graphed as its “downside” scenario.</p>
<hr>
<h2>Reserve Bank GDP forecasts</h2>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/430448/original/file-20211105-15-erb0g1.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/430448/original/file-20211105-15-erb0g1.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=364&fit=crop&dpr=1 600w, https://images.theconversation.com/files/430448/original/file-20211105-15-erb0g1.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=364&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/430448/original/file-20211105-15-erb0g1.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=364&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/430448/original/file-20211105-15-erb0g1.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=457&fit=crop&dpr=1 754w, https://images.theconversation.com/files/430448/original/file-20211105-15-erb0g1.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=457&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/430448/original/file-20211105-15-erb0g1.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=457&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Index numbers, December 2019 = 100.</span>
<span class="attribution"><a class="source" href="https://www.rba.gov.au/publications/smp/2021/nov/economic-outlook.html">RBAABS; RBA</a></span>
</figcaption>
</figure>
<hr>
<p>As a sign of emerging confidence it points to an increase in the number of people prepared to change jobs because they are looking for something better or different. </p>
<p>It says this is partly a bounce back from the start of the COVID recession when workers appeared to put plans they might have had to change jobs on hold.</p>
<hr>
<h2>Reasons people left jobs in past three months</h2>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/430444/original/file-20211105-21-1nrh6dd.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/430444/original/file-20211105-21-1nrh6dd.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/430444/original/file-20211105-21-1nrh6dd.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=318&fit=crop&dpr=1 600w, https://images.theconversation.com/files/430444/original/file-20211105-21-1nrh6dd.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=318&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/430444/original/file-20211105-21-1nrh6dd.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=318&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/430444/original/file-20211105-21-1nrh6dd.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=399&fit=crop&dpr=1 754w, https://images.theconversation.com/files/430444/original/file-20211105-21-1nrh6dd.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=399&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/430444/original/file-20211105-21-1nrh6dd.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=399&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.rba.gov.au/publications/smp/2021/nov/domestic-economic-conditions.html">RBA, ABS</a></span>
</figcaption>
</figure>
<hr>
<p>The Bank is concerned about property markets at home and abroad.</p>
<p>It says the possible collapse of the large and highly leveraged Chinese developer Evergrande might “lead to a significant slowdown in the Chinese economy”. </p>
<p>Average home prices have reached fresh highs in most Australian cities.</p>
<hr>
<h2>Median Australian home prices</h2>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/430446/original/file-20211105-16-1xk9y27.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/430446/original/file-20211105-16-1xk9y27.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/430446/original/file-20211105-16-1xk9y27.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=330&fit=crop&dpr=1 600w, https://images.theconversation.com/files/430446/original/file-20211105-16-1xk9y27.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=330&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/430446/original/file-20211105-16-1xk9y27.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=330&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/430446/original/file-20211105-16-1xk9y27.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=415&fit=crop&dpr=1 754w, https://images.theconversation.com/files/430446/original/file-20211105-16-1xk9y27.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=415&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/430446/original/file-20211105-16-1xk9y27.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=415&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Seasonally adjusted, log scale.</span>
<span class="attribution"><a class="source" href="https://www.rba.gov.au/publications/smp/2021/nov/domestic-economic-conditions.html">CoreLogic,RBA</a></span>
</figcaption>
</figure>
<hr>
<p>It says while interest payments have declined by around one percentage point of disposable income since March 2020 because of lower interest rates, the financial system faces risks associated with high and rising household indebtedness.</p>
<p>While it says mortgage rates will climb, and while financial market pricing implies quite rapid increases in the Bank’s cash rate, it doesn’t expect to lift the rate until 2024 (which is the year after Governor Philip Lowe’s term is due to end, raising the prospect of him completing his seven-year term without once lifting rates).</p>
<hr>
<p><strong>Implied market cash rate forecasts</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/430447/original/file-20211105-13-186l2w0.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/430447/original/file-20211105-13-186l2w0.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/430447/original/file-20211105-13-186l2w0.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=301&fit=crop&dpr=1 600w, https://images.theconversation.com/files/430447/original/file-20211105-13-186l2w0.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=301&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/430447/original/file-20211105-13-186l2w0.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=301&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/430447/original/file-20211105-13-186l2w0.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=378&fit=crop&dpr=1 754w, https://images.theconversation.com/files/430447/original/file-20211105-13-186l2w0.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=378&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/430447/original/file-20211105-13-186l2w0.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=378&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.rba.gov.au/publications/smp/2021/nov/domestic-financial-conditions.html">Bloomberg; RBA</a></span>
</figcaption>
</figure>
<hr>
<p>The Bank has consistently said it will “not increase the cash rate until actual inflation is <a href="https://www.rba.gov.au/education/resources/explainers/australias-inflation-target.html">sustainably within</a> the 2–3% target range”.</p>
<p>It has also said it is not enough for inflation to be <a href="https://www.rba.gov.au/speeches/2020/pdf/sp-gov-2020-11-03.pdf">merely forecast</a> to be within the range, creating a high bar for action.</p>
<p>Although at <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release">2.1%</a> over the year underlying inflation is the highest it has been since 2015, it is still towards the bottom of the Bank’s target band.</p>
<h2>Inflation weaker than it looks</h2>
<p>And the rate reflects some temporary factors. Some of it is due to the rebound in petrol prices as demand has picked up as people have returned to work, something that won’t continue.</p>
<p>The Bank expects underlying inflation over the course of 2022 to be 2.25%. Although well above the previous forecast of 1.75%, it is below the mid point of its target.</p>
<p>It doesn’t expect inflation of 2.5% until 2023, suggesting no rate hike until then.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/reserve-bank-not-for-turning-no-rate-hike-until-unemployment-near-4-5-154560">Reserve Bank not for turning. No rate hike until unemployment near 4.5%</a>
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</em>
</p>
<hr>
<p>The labour market outlook is little changed from the Bank’s August statement. It expects unemployment to fall to a historic low 4.25% by the end of 2022 and then to 4% in 2023. </p>
<p>Even then, in 2023, it expects only modest wage growth of 3%, doing little to support the sustainably higher inflation it says it would need to see before it lifts rates.</p><img src="https://counter.theconversation.com/content/170716/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Hawkins is a former economic forecaster in the Reserve Bank and Treasury.</span></em></p>In its quarterly statement on the economy the Bank is at pains to suggest it won’t be lifting interest rates quickly.John Hawkins, Senior Lecturer, Canberra School of Politics, Economics and Society and NATSEM, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1564102021-03-04T19:25:03Z2021-03-04T19:25:03ZVital Signs: In the battle over interest rates, it’d be unwise to bet against the RBA<figure><img src="https://images.theconversation.com/files/387691/original/file-20210304-13-1v556kp.jpg?ixlib=rb-1.1.0&rect=161%2C121%2C2765%2C1665&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Alf Ribeiro/Shutterstock</span></span></figcaption></figure><p>After years of repeatedly <a href="https://theconversation.com/vital-signs-yet-another-year-of-steady-rates-whats-the-point-of-the-rba-inflation-target-110574">missing its inflation target</a> through too timid monetary policy, in the past week the Reserve Bank has decided to get tough.</p>
<p>Not only did it hold its closely watched <a href="https://rba.gov.au/statistics/cash-rate/">cash rate</a> target steady at 0.10% at Tuesday’s board meeting, it ramped up its efforts to defend its separate 0.10% target for the three-year government bond rate in the face of a mini-revolt by bond traders.</p>
<p>A few weeks back, some of the traders in Australia and elsewhere got it into their heads that big borrowing by governments would force up bond rates - a relationship that was once thought to be clear cut but hasn’t held for some time.</p>
<p>The traders sold government bonds issued by Australia and other nations, which in the case of the bond market, <a href="https://www.investopedia.com/articles/bonds/07/price_yield.asp">forces up the bond interest rate</a>.</p>
<p>Then other traders piled on, partly because economic outlooks are improving and they thought governments might soon be issuing fewer bonds, and partly because they thought other traders might agree with the traders.</p>
<p>That’s right: “thought other traders might agree with the traders”.</p>
<h2>Beauty contests can make markets mad</h2>
<p>In financial markets you don’t make money by correctly guessing what will happen, you make it by correctly guessing what other traders think will happen.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/387688/original/file-20210304-19-1c8rpjd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/387688/original/file-20210304-19-1c8rpjd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/387688/original/file-20210304-19-1c8rpjd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=971&fit=crop&dpr=1 600w, https://images.theconversation.com/files/387688/original/file-20210304-19-1c8rpjd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=971&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/387688/original/file-20210304-19-1c8rpjd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=971&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/387688/original/file-20210304-19-1c8rpjd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1220&fit=crop&dpr=1 754w, https://images.theconversation.com/files/387688/original/file-20210304-19-1c8rpjd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1220&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/387688/original/file-20210304-19-1c8rpjd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1220&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">In Family Feud, you win if you guess the most popular answers, not the right answers.</span>
</figcaption>
</figure>
<p>One of the founders of modern economics, John Maynard Keynes, described it as a beauty contest in which judges are rewarded not for picking the most beautiful face, but for picking the face <a href="https://www.zeninvestor.org/keynesian-beauty-contest/">other judges</a> will think is the most beautiful.</p>
<p>It’s like the rules in <a href="https://www.liveabout.com/family-feud-brief-overview-1396911">Family Feud</a>.</p>
<p>The yield on Australian Commonwealth 10-year bonds climbed from 0.98% at the start of the year to 1.11% a month later, to an extraordinary 1.87% a month after that - a near-doubling in a matter of weeks.</p>
<p>Even the yield on three-year bonds, which the Reserve Bank has pledged to keep at <a href="https://theconversation.com/5-ways-the-reserve-bank-is-going-to-bat-for-australia-like-never-before-149311">0.10%</a> crept up to 0.13%.</p>
<p>Last Friday, the Reserve Bank fought back. </p>
<p>It bought extra bonds a day after completing its usual purchases on Thursday. </p>
<p>This Tuesday, in its statement after its monthly board meeting, it added nine words to its usual acknowledgement that “<a href="https://www.rba.gov.au/media-releases/2021/mr-21-01.html">wage and price pressures remain subdued</a>”. </p>
<p>Those words were: “<a href="https://www.rba.gov.au/media-releases/2021/mr-21-03.html">and are expected to remain so for some years</a>”.</p>
<p>And then it released a <a href="https://www.rba.gov.au/mkt-operations/announcements/rba-purchases-of-government-securities-2021-03.html">separate statement</a> reiterating that when its A$100 billion program of buying $5 billion of government bonds each week expires in May it will launch another $100 billion program, taking the scheduled bond buying through to November.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/5-ways-the-reserve-bank-is-going-to-bat-for-australia-like-never-before-149311">5 ways the Reserve Bank is going to bat for Australia like never before</a>
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</p>
<hr>
<p>Since the program began last November, the bank has bought $74 billion of bonds. Its message was that if traders thought it was within $26 billion of running out of ammunition, it had another $100 billion. It doubled <a href="https://www.youtube.com/watch?v=X-M8e1YYiQg">the size of its knife</a>.</p>
<h2>The bank can’t afford to lose</h2>
<p>Keeping control of rates is a fight the Reserve Bank has to win. When it announces a change in an interest rate, usually the <a href="https://rba.gov.au/statistics/cash-rate/">cash rate</a>, it uses words along the lines of “<a href="https://www.rba.gov.au/media-releases/2020/mr-20-06.html">the board decided to lower the cash rate</a>,” implying that it can.</p>
<p>The more accurate words it <a href="https://www.rba.gov.au/media-releases/2001/mr-01-17.html">used to use</a> were “the bank will be operating in the money market this morning to reduce the cash rate,” an admission that it could only try to move the cash rate, by trading in financial instruments.</p>
<p>So effective have its pronouncements become that in recent years it hasn’t needed to do much trading to move the cash rate - it has just announced the move knowing that traders will fall into line because it could buy or sell financial instruments if it wanted to.</p>
<p>If it loses a battle with traders over rates, what it says will have much less force.</p>
<h2>It has the resources it needs to win</h2>
<p>The bank will win whatever battle it chooses to fight because it has unlimited resources. Unlike traders, it can <a href="https://www.rba.gov.au/education/resources/explainers/unconventional-monetary-policy.html">create</a> as many Australian dollars as it needs in order to buy as many bonds as it needs.</p>
<p>So far it has chosen to defend its ground on the cash rate and the three-year bond rate. It wants both at 0.1%.</p>
<p>It said on Tuesday it would “not increase the cash rate until actual inflation is sustainably within the 2 to 3% target range”.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/josh-frydenberg-has-the-opportunity-to-transform-australia-permanently-lowering-unemployment-156175">Josh Frydenberg has the opportunity to transform Australia, permanently lowering unemployment</a>
</strong>
</em>
</p>
<hr>
<p>It added that for that to occur, wage growth will have to be “materially higher”, which would require significant gains in employment and a return to a tight labour market.</p>
<p>And then the killer sentence, <a href="https://www.rba.gov.au/media-releases/2021/mr-21-03.html">the last</a>, aimed directly at the traders: “The Board does not expect these conditions to be met until 2024 at the earliest.”</p>
<p>Although it released the statement one day before Wednesday’s <a href="https://theconversation.com/gdp-is-v-shaped-but-not-yet-good-these-three-graphs-tell-the-story-156372">national accounts</a> that showed the economic recovery continuing, it would have been aware of what they were likely to show. </p>
<p>It remains resolute.</p><img src="https://counter.theconversation.com/content/156410/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Reserve Bank has limitless access to Australian dollars and a reputation to protect.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1495232020-11-11T19:19:49Z2020-11-11T19:19:49ZWhy zero interest rates are here to stay<figure><img src="https://images.theconversation.com/files/368819/original/file-20201111-13-1olrvsy.jpg?ixlib=rb-1.1.0&rect=703%2C269%2C2747%2C1728&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">ksb/Shutterstock</span></span></figcaption></figure><p>It’d be wrong to interpret last week’s Reserve Bank decision to cut its cash rate to <a href="https://theconversation.com/5-ways-the-reserve-bank-is-going-to-bat-for-australia-like-never-before-149311">0.10%</a> as an emergency response to the COVID crisis. </p>
<p>The implication would be that once the pandemic is controlled the economy will return to something like the pre-crisis “normal” and the ultra-low interest rates will end.</p>
<p>In reality, in this as in many other things, the pandemic has merely accelerated developments that have been underway for a long time. </p>
<p>One is the long-term decline in the “neutral” rate of interest. </p>
<p>The <a href="https://www.brookings.edu/blog/up-front/2018/10/22/the-hutchins-center-explains-the-neutral-rate-of-interest/">neutral rate</a> is normally defined as the real (inflation-adjusted) rate of interest which is neither expansionary, pushing up inflation, nor contractionary, pushing up unemployment.</p>
<p>More importantly the neutral rate should be one that over time matches the total supply of savings with the total demand for those savings by businesses and households wanting to put them to work making buildings and equipment (capital investment). </p>
<h2>‘Neutral’ is less than it was</h2>
<p>As Treasury Secretary Stephen Kennedy observed in this year’s post-budget address, the neutral rate of interest has been <a href="https://treasury.gov.au/speech/policy-and-evolution-uncertainty">falling for 40 years</a>. </p>
<p>Reserve Bank estimates suggest it fell from around 3% in the 1980s and 1990s to around <a href="https://www.rba.gov.au/publications/bulletin/2017/sep/2.html">less than 1%</a> in 2016.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/368789/original/file-20201111-19-9vx7mh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/368789/original/file-20201111-19-9vx7mh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/368789/original/file-20201111-19-9vx7mh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=392&fit=crop&dpr=1 600w, https://images.theconversation.com/files/368789/original/file-20201111-19-9vx7mh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=392&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/368789/original/file-20201111-19-9vx7mh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=392&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/368789/original/file-20201111-19-9vx7mh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=493&fit=crop&dpr=1 754w, https://images.theconversation.com/files/368789/original/file-20201111-19-9vx7mh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=493&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/368789/original/file-20201111-19-9vx7mh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=493&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Model -based estimates of real neutral rate.</span>
<span class="attribution"><a class="source" href="https://www.rba.gov.au/publications/bulletin/2017/sep/2.html">Rachael McCririck and Daniel Rees, Reserve Bank Bulletin September 2017</a></span>
</figcaption>
</figure>
<p>It will have fallen further since, and fallen more sharply since the pandemic began, turning negative.</p>
<p>One way to work that out what the Reserve Bank thinks the real neutral rate is now is to look at where the nominal cash rate is now (near zero) and what the bank says inflation will have to climb to before it will allow the cash rate to climb (<a href="https://theconversation.com/5-ways-the-reserve-bank-is-going-to-bat-for-australia-like-never-before-149311">2%</a>).</p>
<p>This suggests the bank believes the real (inflation adjusted) neutral cash rate is minus 2%.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/weve-just-sold-15-billion-31-year-bonds-whats-a-bond-143598">We've just sold $15 billion 31-year bonds. What's a bond?</a>
</strong>
</em>
</p>
<hr>
<p>Another way to get a handle on it is to look at long-term real rates, one of the longest being the return on a 30-year US Treasury inflation-indexed bond.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/368821/original/file-20201111-13-1sax0ag.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/368821/original/file-20201111-13-1sax0ag.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/368821/original/file-20201111-13-1sax0ag.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=236&fit=crop&dpr=1 600w, https://images.theconversation.com/files/368821/original/file-20201111-13-1sax0ag.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=236&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/368821/original/file-20201111-13-1sax0ag.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=236&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/368821/original/file-20201111-13-1sax0ag.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=296&fit=crop&dpr=1 754w, https://images.theconversation.com/files/368821/original/file-20201111-13-1sax0ag.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=296&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/368821/original/file-20201111-13-1sax0ag.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=296&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Constant maturity, orange = recession.</span>
<span class="attribution"><a class="source" href="https://fred.stlouisfed.org/series/DFII30">Federal Reserve Board of St. Louis</a></span>
</figcaption>
</figure>
<p>Like the Reserve Bank estimate of the neutral rate for Australia, this estimate for the US fell to around 1% by 2016. </p>
<p>Then it fell further, dropping to close to zero by the start of this year, before turning negative with the onset of the pandemic.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/368806/original/file-20201111-23-1v8qogs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/368806/original/file-20201111-23-1v8qogs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/368806/original/file-20201111-23-1v8qogs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=971&fit=crop&dpr=1 600w, https://images.theconversation.com/files/368806/original/file-20201111-23-1v8qogs.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=971&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/368806/original/file-20201111-23-1v8qogs.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=971&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/368806/original/file-20201111-23-1v8qogs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1220&fit=crop&dpr=1 754w, https://images.theconversation.com/files/368806/original/file-20201111-23-1v8qogs.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1220&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/368806/original/file-20201111-23-1v8qogs.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1220&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Even Alphabet, the parent of Google, is borrowing at less than the inflation target.</span>
<span class="attribution"><span class="source">Uladzik Kryhin/Shutterstock</span></span>
</figcaption>
</figure>
<p>Most other countries don’t sell inflation-indexed bonds with such long maturities. But the 50-year and 100-year non-indexed bonds issued by a number of OECD countries are yielding interest rates below 2%, the target rate of inflation for most central banks. </p>
<p>Even highly-rated private corporations like Alphabet (the parent of Google) are refinancing their debt with long-term bonds paying <a href="https://www.afr.com/markets/debt-markets/alphabet-locks-in-record-low-funding-costs-20200804-p55iho">less than 2%</a>.</p>
<h2>Too much saving?</h2>
<p>Much of the discussion of declining interest rates has focused on the idea of a “savings glut”, with a particular focus on China, which had very high savings rates early this century. </p>
<p>But China’s savings rate peaked some years ago and is headed down. Savings rates in other countries have been falling as well. </p>
<h2>Too little investment</h2>
<p>The real problem is a lack of demand for those saved funds. </p>
<p>Corporate profits have grown strongly, but instead of being reinvested they have often been <a href="https://theconversation.com/the-last-thing-companies-should-be-doing-right-now-is-paying-dividends-135928">returned to shareholders</a>, through either dividends or share buybacks.</p>
<p>Companies seem to believe they don’t need that many funds.</p>
<p>The simplest explanation is that the dominant firms in an information economy don’t need much capital in the form of buildings and equipment to maintain their position. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/vital-signs-business-investment-is-flatlining-and-it-isnt-clear-that-suasion-or-a-special-allowance-will-help-122614">Vital Signs. Business investment is flatlining, and it isn't clear that suasion or a special allowance will help</a>
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<p>The market value of a typical manufacturing or resource-based firm is usually about the same as the book value of the capital invested in the firm. In the jargon of financial markets, the <a href="https://www.investopedia.com/terms/p/price-to-bookratio.asp">price-book ratio</a> is close to 1.</p>
<p>By contrast, leading firms in the information economy, such as Alphabet and Facebook, have price-book ratios of five or six. Microsoft and Apple, with profits derived from control of operating systems that require only gradual upgrades, have price-book ratios of 15 and 21.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/we-asked-13-economists-how-to-fix-things-all-back-the-rba-governor-over-the-treasurer-126283">We asked 13 economists how to fix things. All back the RBA governor over the treasurer</a>
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<p>Public investment hasn’t come to the rescue enough, even when it has been cheap to borrow.</p>
<p>It’s been tightly constrained by decades of policy driven the ideas variously described as neoliberalism, economic rationalism and market liberalism.</p>
<p>Bank of England economist Lukasz Rachel and former US Treasury Secretary Larry Summers argue that in the absence of the large-scale public programs we have had, the neutral rate of interest would be <a href="https://www.brookings.edu/bpea-articles/on-falling-neutral-real-rates-fiscal-policy-and-the-risk-of-secular-stagnation/">even lower</a>.</p>
<h2>There’s no sign of a revival</h2>
<p>When there’s a greater supply of something (savings) than there is demand for it (for investment) the price of it (the interest rate) won’t rise. </p>
<p>After we emerge from the pandemic we are going to have to adjust to a world where interest rates (at least adjusted for inflation) are permanently at or below zero. </p>
<p>As Dorothy says to Toto in the Wizard of Oz (believed by some to be an allegory about <a href="https://blogs.stthom.edu/cameron/the-wizard-of-oz-as-a-monetary-allegory/">monetary policy</a>) “we’re not in Kansas any more”.</p><img src="https://counter.theconversation.com/content/149523/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Quiggin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>There’s more to that Coronavirus. Even before it, businesses weren’t keen to invest.John Quiggin, Professor, School of Economics, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1302892020-01-27T18:58:56Z2020-01-27T18:58:56Z2020 survey: no lift in wage growth, no lift in economic growth and no progress on unemployment in year of low expectations<figure><img src="https://images.theconversation.com/files/311739/original/file-20200124-81411-2qr7n4.png?ixlib=rb-1.1.0&rect=77%2C23%2C3562%2C1970&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Wes Mountain/The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span></figcaption></figure><p>2020 is shaping up as a dismal year for the economy, with no progress on many of the key measures that matter for Australians.</p>
<p>Unemployment will stay above 5% and probably rise rather than fall. </p>
<p>Economic growth will continue to have a “1” in front of it, instead of the “2” or “3” that used to be common, and living standards will grow more slowly. </p>
<p>Wage growth, forecast in the budget to climb to 3%, will instead remain stuck near 2.2%, where it has been for half a decade.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/we-asked-13-economists-how-to-fix-things-all-back-the-rba-governor-over-the-treasurer-126283">We asked 13 economists how to fix things. All back the RBA governor over the treasurer</a>
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<p>Those are the <a href="https://cdn.theconversation.com/static_files/files/857/2020___CONVERSATION_ECONOMIC_SURVEY.pdf?1579661077">central forecasts</a> of a panel of 24 leading economists from 15 universities in six states assembled by The Conversation to review the year ahead, a year they expect to be marked by one only more interest rate cut, more modest growth in house prices, and a return to slower growth in the share market. </p>
<p>The panel comprises macroeconomists, economic modellers, former Treasury, IMF, OECD, Reserve Bank and financial market economists, and a former member of the Reserve Bank board. Combined, their forecasts are more likely to be correct than those of any individual member. One-third are women.</p>
<p>They expect the long-promised budget surplus to all but disappear as a result of responses to the bushfires and weaker-than-predicted economic growth.</p>
<h2>Economic growth</h2>
<p>The Treasury believes the Australian economy is capable of growing at a sustained annual pace of <a href="https://www.smh.com.au/business/the-economy/australias-economy-grew-08-per-cent-in-june-quarter-20170906-gybpqu.html">2.7%</a>, but it hasn’t grown that fast since mid-2018. Growth slipped below 2% in March 2019 and hasn’t recovered. It now has been below 2% for <a href="https://theconversation.com/gdp-update-spending-dips-and-saving-soars-as-we-stash-rather-than-spend-our-tax-cuts-128297">three consecutive quarters</a>, the longest period since the global financial crisis.</p>
<p>The panel’s central forecast is for economic growth to stay at or below 2% for at least another year, producing the longest period of low economic growth since the early 1990s recession. The average forecast for the year to December is 1.9%.</p>
<p>Panellist Saul Eslake says it will be the result of persistently slow growth in household disposable incomes, reflecting “very slow growth in real wages, the increasing proportion of gross income absorbed by tax, and weakness in property income (interest and rent) as well as (at the margin) the impact of the drought on farm incomes”.</p>
<p>It will be domestic rather than overseas conditions that hold back Australian growth. US economic growth is expected to remain little changed at 2.1% notwithstanding trade friction with China, and China’s officially reported growth is expected to ease back only slightly from 6% to 5.8%. </p>
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<p><iframe id="2I7gi" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/2I7gi/3/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
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<h2>Living standards</h2>
<p>One of the best measures of overall living standards (the one the Reserve Bank watches) is real net national disposable income per capita, which takes better account of buying power than gross domestic product does. In the year to September it climbed an unusual 3.3%, pushed up by a resurgence in iron ore export prices. </p>
<p>The iron ore price has since slid from US$120 a tonne to around US$90 a tonne, and the panel’s average forecast is for it to fall further.</p>
<p>As a result it expects growth in living standards to slow to 2.4% in 2020, a result that will still be better than between 2012 and 2016 when a dive in export prices sent it backwards.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-weve-the-weakest-economy-since-the-global-financial-crisis-with-few-clear-ways-out-122942">Why we've the weakest economy since the global financial crisis, with few clear ways out</a>
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<p>Growth in nominal GDP, the raw total unadjusted for inflation, is also expected to slow, slipping from 5.4% to 4.4% as export prices weaken, producing a decline in revenue growth the government has already factored in to the budget.</p>
<p>The unemployment rate is expected to end the year near the top of the 5%-to-5.5% band it has been stuck in for the past two years, rather than falling to the 5% forecast in the budget or towards the <a href="https://www.rba.gov.au/publications/smp/2019/nov/overview.html">4.5%</a> the Reserve Bank believes is possible.</p>
<p>Only one of the panel, Warren Hogan, expects the unemployment rate to end the year below 5%. </p>
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<p><iframe id="5RnFy" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/5RnFy/3/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
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<h2>Wages and prices</h2>
<p>The panel’s central forecast is for inflation to remain below the bottom of the Reserve Bank’s 2-3% target band, where it has been for most of the past five years.</p>
<p>One panellist, Margaret McKenzie, breaks ranks. She expects the drought and bushfires and floods to sharply push up the cost of food and essential items including energy, quickly pushing inflation into the range the authorities have long wanted, but not for the reasons they wanted.</p>
<p>“I don’t think people have thought about it, because there hasn’t been inflation for so long,” she says. “The problem is that the fires are likely to contract an already weak economy, impelling the Reserve Bank to cut interest rates further, even though its inflation targeting regime would tell it not to.”</p>
<p>Wage growth is forecast to be well below the highest inflation forecast and only a little above the central forecast, resulting in continued low real wage growth and seeing the budget miss its wage growth target for the eighth year in a row. </p>
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<p><iframe id="GN8R8" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/GN8R8/3/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
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<h2>Business</h2>
<p>Household spending barely grew in the year to September, inching ahead by a shockingly low 1.2%, the least since the financial crisis, and not enough to account for population growth. </p>
<p>The panel’s central forecast is for a recovery in spending growth to a still-low 2.4%, with spending held back by low consumer confidence and what former Organisation for Economic Co-operation and Development director Adrian Blundell-Wignall calls a “sense that we are living on borrowed time”. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/gdp-update-spending-dips-and-saving-soars-as-we-stash-rather-than-spend-our-tax-cuts-128297">GDP update: spending dips and saving soars as we stash rather than spend our tax cuts</a>
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<p>“China is slowing, bank-financed housing has been pushing the envelope and is very expensive, and the governments have never had a plan for the next phase of sustainable growth,” he says. “This perception of no confidence in the government has not been helped by the bushfire events.” </p>
<p>There are few signs of a recovery in business investment, notwithstanding record-low interest rates. </p>
<p>The panel’s average forecast is for investment by mining and non-mining companies to grow by only 1.7% and 1.9% in 2020, which will represent a turnaround for mining, in which investment fell 11.2% in the year to September.</p>
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<p><iframe id="rUx3F" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/rUx3F/3/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
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<h2>Markets</h2>
<p>Financial markets should provide less support to households in the year ahead, with the ASX 200 share price index expected to climb only 6.4% after soaring 20% in the year just ended. </p>
<p>None of the panellists expect last year’s growth to continue.</p>
<p>The Australian dollar is expected to end the year at 68 US cents, close to where it is at present. The iron ore price is expected to fall to US$75, a smaller slide than was assumed in the budget.</p>
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<h2>Home prices</h2>
<p>Housing investment (homebuilding) is expected to stabilise in 2020, falling only slightly from here on, after sliding 9.6% in the year to September 2019. </p>
<p>Sydney and Melbourne home prices are expected to continue to recover, growing by 5% in 2020. </p>
<p>Panellist Nigel Stapledon says the higher home prices will in time boost perceptions of wealth, opening up the possibility that consumer spending will “surprise on the upside”. </p>
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<h2>Interest rates and budget</h2>
<p>The panel’s central forecast is for only one more cut in the Reserve Bank’s cash rate this year, in the first half, followed by no further cuts in the second half. This would allow the bank to avoid so-called unconventional monetary policy or “quantitative easing” in which it forces down longer-term rates by buying government and private bonds, an option Governor Philip Lowe said it would only resort to after it had cut its cash rate to 0.25%.</p>
<p>The single cut would take the cash rate to an all-time low of 0.5%. In anticipation the ANZ cut its online saver account rate from 0.1% to <a href="https://www.smh.com.au/politics/federal/anz-cuts-deposit-rates-to-all-time-low-20200123-p53tzd.html">0.05%</a> on Thursday. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/now-we-know-the-reserve-bank-has-spelled-out-what-it-will-do-when-rates-approach-zero-127697">Now we know. The Reserve Bank has spelled out what it will do when rates approach zero</a>
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<p>The cut could come as soon as next week when the board holds its first meeting for the year on February 4. Governor Lowe has scheduled an address to the National Press Club for <a href="https://www.rba.gov.au/media/">the following day</a>.</p>
<p>Most of the panel think quantitative easing will not be needed and many question its effectiveness, saying the government could achieve much more by fully abandoning its commitment to surplus in order to stimulate the economy.</p>
<p>The panel expects the government’s 10-year bond rate to remain historically low at 1.3%. That makes it about as cheap as it has ever been for the government to borrow for worthwhile purposes.</p>
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<p><iframe id="9nmRo" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/9nmRo/3/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
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<p>Treasurer Josh Frydenberg has abandoned his absolute commitment to return the budget to surplus this financial year, saying his first priority is “<a href="https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/transcripts/doorstop-interview-treasury-canberra">meeting the human cost of the bushfires</a>”.</p>
<p>The 2019-20 surplus was forecast at A$7.1 billion in the May budget and then downgraded to $5 billion in the December update. </p>
<p>The panel’s average forecast is for a bushfire-ravaged $2.2 billion. </p>
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<p>Most of the panel believe that with good management the government can avoid a recession for another two years, propelling the Australia economy into what will be its 30th straight year of expansion. </p>
<p>On average they assign a 27% probability to a recession within the next two years, down from their average forecast of 29% in June.</p>
<p>Several point out that, whereas the main risks to continued growth come from overseas, China appears to be managing its slowing economy better than expected, although the emergency triggered by the new and deadly <a href="https://theconversation.com/should-we-be-worried-about-the-new-wuhan-coronavirus-130366">Wuhan coronavirus</a> might change that.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/their-biggest-challenge-avoiding-a-recession-117381">Their biggest challenge? Avoiding a recession</a>
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</em>
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<p>Among those who do fear a home-bred recession is Julie Toth who has lifted her estimate of the likelihood of a recession from 25% to 50%, saying growth is already so weak that it won’t take much to send it backwards.</p>
<p>“The bushfire disaster presents the real and immediate possibility of two quarters of negative growth for the fourth quarter of 2019 and the first quarter of of 2020,” she says.</p>
<p>“Even if disaster relief and fiscal stimulus are delivered swiftly, resource constraints (a lack of skilled tradespeople, water, equipment and appropriate building materials) mean reconstruction will be very slow.”</p>
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<p>The panel began compiling its responses when the bushfires weren’t as bad as they subsequently became and before the emergence of the Wuhan coronavirus. </p>
<p>It delivered its final forecasts on January 20 when the worst of the bushfires appeared to have passed but before the coronavirus had <a href="https://theconversation.com/the-wuhan-coronavirus-is-now-in-australia-heres-what-you-need-to-know-130580">spread</a> to Australia. </p>
<p>The effects of both won’t be known for some time.</p>
<p>2020 is turning out to be a year of uncertainty, as well as low expectations.</p>
<hr>
<h2>The Conversation 2020 Forecasting Panel</h2>
<p><em>Click on economist to see full profile.</em></p>
<p><iframe id="tc-infographic-457" class="tc-infographic" height="400px" src="https://cdn.theconversation.com/infographics/457/bf44ce885daf5a3f6f0c3f21add509bc262c561f/site/index.html" width="100%" style="border: none" frameborder="0"></iframe></p>
<p><a href="https://cdn.theconversation.com/static_files/files/1355/2020_survey_-_Raw_data.pdf?1607169630">PDF OF RESULTS</a></p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/buckle-up-2019-20-survey-finds-the-economy-weak-and-heading-down-and-thats-ahead-of-surprises-119455">Buckle up. 2019-20 survey finds the economy weak and heading down, and that's ahead of surprises</a>
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<img src="https://counter.theconversation.com/content/130289/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Conversation’s 2020 economic survey points to a dismal year, with no progress on many of the key measures that matter for Australians and an increase in the unemployment rate.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1257052019-10-23T05:55:26Z2019-10-23T05:55:26ZIf you want to boost the economy, big infrastructure projects won’t cut it: new Treasury boss<p>Treasury secretary Steven Kennedy – in the job for for just weeks after moving across from the department of infrastructure last month – has dismissed talk of spending big on infrastructure in order to escape an economic downturn.</p>
<p>Such calls “sound straightforward, but in practice are difficult to achieve”, he told a <a href="https://www.treasury.gov.au/speech/opening-statement-october-2019-senate-estimates">Senate hearing</a> on Wednesday.</p>
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<p>The timing requirements of fiscal stimulus are hard to give effect to while ensuring large projects are well planned and executed, and cost and capacity pressures are managed. There are some opportunities though, usually related to smaller projects and maintenance expenditure. The Commonwealth and state Governments are currently actively exploring these opportunities.</p>
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<p>More broadly he made it plain that it was the role of the Reserve Bank rather than the Treasury to provide economic stimulus.</p>
<p>The bank has already cut its cash rate to a <a href="https://theconversation.com/0-75-is-a-record-low-but-dont-think-for-a-second-the-reserve-bank-has-finished-cutting-the-cash-rate-124499">record low of 0.75%</a> and has indicated it is prepared to consider <a href="https://www.afr.com/policy/economy/qe-valuable-with-fiscal-support-lowe-20191007-p52yaz">unconventional</a> monetary policy measures that would have the effect of cutting a wider range of rates.</p>
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<a href="https://theconversation.com/0-75-is-a-record-low-but-dont-think-for-a-second-the-reserve-bank-has-finished-cutting-the-cash-rate-124499">0.75% is a record low, but don't think for a second the Reserve Bank has finished cutting the cash rate</a>
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<p>However, bank Governor Philip Lowe said last week such tools would be most effective “when used together with a broader set of policies”, including government spending and tax policies.</p>
<h2>Without crisis, no need to spend more</h2>
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<a href="https://images.theconversation.com/files/298249/original/file-20191023-149545-1ucatsp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/298249/original/file-20191023-149545-1ucatsp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/298249/original/file-20191023-149545-1ucatsp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=794&fit=crop&dpr=1 600w, https://images.theconversation.com/files/298249/original/file-20191023-149545-1ucatsp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=794&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/298249/original/file-20191023-149545-1ucatsp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=794&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/298249/original/file-20191023-149545-1ucatsp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=998&fit=crop&dpr=1 754w, https://images.theconversation.com/files/298249/original/file-20191023-149545-1ucatsp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=998&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/298249/original/file-20191023-149545-1ucatsp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=998&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">No crisis. Treasury Secretary Steven Kennedy.</span>
<span class="attribution"><span class="source">Mick Tsikas/AAP</span></span>
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<p>Kennedy rejected the idea of extra spending except in an emergency, saying Treasury could best serve Australia’s interests by a “stable and predictable” policy framework that kept the budget near balance over time.</p>
<p>There would be times when a downturn cut revenue and increased spending on support payments, pushing the budget into deficit, but beyond allowing those so-called <a href="https://www.treasury.gov.au/speech/opening-statement-october-2019-senate-estimates">automatic stabilisers</a> to operate there wasn’t normally a case for doing more.</p>
<p>The exceptions were “periods of crisis”.</p>
<p>“It is important to consider separately broader policy objectives and temporary responses to crisis,” Kennedy said. </p>
<p>“The circumstances or crisis that would warrant temporary fiscal responses are uncommon.”</p>
<p>Although Australia’s economy is not in crisis, Brexit, the US-China trade war and turmoil in Hong Kong have slowed economic and trade growth worldwide, as businesses opt to stay on the sidelines.</p>
<h2>No crisis, but weak growth worldwide</h2>
<p>In Australia, economic growth had been unusually weak, weighed down by weak household spending which was itself the result of weak income growth, weak house prices, weak housing investment, and weaker than expected non-mining investment. </p>
<p>Mining investment was down sharply, as was to be expected after the completion of several large liquefied natural gas projects.</p>
<p>Given low interest rates, it was “somewhat of a puzzle” that business investment was not growing faster. Partly that might be because the “hurdle rates” businesses use to assess projects have not been adjusted down as they should have been. Partly it might be because of uncertainties surrounding the global economy and technological change. </p>
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<p>Structural factors may also be at play — it is not clear what business investment looks like in a world where more than two thirds of our economy is now services based.</p>
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<p>The budget tax cuts that flowed into returns <a href="https://theconversation.com/its-the-budget-cash-splash-that-reaches-back-in-time-114188">from July</a> have not yet led to a “particularly large improvement” in household spending. </p>
<h2>Wages, investment “somewhat of a puzzle”</h2>
<p>“We will continue to assess the data on consumption as it becomes available, but it is worth noting that even if households initially use the tax cuts to pay down debt faster, this will still bring forward the point at which households could increase their spending,” Dr Kennedy said. </p>
<p>It is possible that spending might have been even weaker without the tax cuts.</p>
<p>Holding back the economy during the year to June has been drought and dry weather which knocked 0.2 percentage points of the economic growth. Holding it up has been larger than normal growth in government spending that contributed 0.2 percentage points more to economic growth than was normal. </p>
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Read more:
<a href="https://theconversation.com/why-weve-the-weakest-economy-since-the-global-financial-crisis-with-few-clear-ways-out-122942">Why we've the weakest economy since the global financial crisis, with few clear ways out</a>
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<p>No one had been able come up with a complete explanation for Australia’s unexpectedly low rate of wage growth. One explanation might be that even though the unemployment rate of 5.2% was unusually low, increases in employment were drawing in older workers and women rather than pushing up wages.</p>
<p>Ultimately what was needed to sustain higher wage growth was productivity growth, and that would be difficult to achieve while business investment was weak. The <a href="https://www.pc.gov.au/inquiries/completed/productivity-review/report">Productivity Commission</a> had come up with a set of recommendations state and federal ministers were working their way through.</p>
<p>Although economic growth has been very low - just 1.4% in the year to June – it grew more strongly in the last half of that year than the first. It might be “strengthening from here”.</p><img src="https://counter.theconversation.com/content/125705/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Treasury Secretary Steven Kennedy says its up to the Reserve Bank to boost the economy. In normal times, that’s not his job.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1248742019-10-10T01:57:32Z2019-10-10T01:57:32ZOur leaders ought to know better: failing to pass on the full rate cut needn’t mean banks are profiteering<figure><img src="https://images.theconversation.com/files/296171/original/file-20191009-3856-ta87ed.jpg?ixlib=rb-1.1.0&rect=107%2C122%2C2145%2C859&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The prime minister says banks are "basically profiteering". It's a difficult case to make.</span> <span class="attribution"><span class="source">Joel Carrett/AAP</span></span></figcaption></figure><p>The unwillingness of the major (and other) banks to immediately cut their headline mortgage rates by as much as the Reserve Bank cuts its cash rate always attracts bad press, as well as condemnation from treasurers and prime ministers.</p>
<p>After the big four passed to variable rate owner-occupiers only 0.13-0.15 percentage points of this month’s 0.25-point cut in the Reserve Bank cash rate, Treasurer Josh Frydenberg said they had decided to put profits “<a href="https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/transcripts/interview-lisa-millar-abc-news-breakfast">before their customers</a>”, adding:</p>
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<p>What we do expect the banks to do is to provide their customers with the best possible deal, and it’s very disappointing that they haven’t done that</p>
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<p>Prime Minister Scott Morrison said the banks were “<a href="https://www.pm.gov.au/media/interview-david-speers-sky">basically profiteering</a>”:</p>
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<p>How else do you describe it? I’ve never been one, whether as treasurer or prime minister, to give the banks a leave pass</p>
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<p>Are the banks “profiteering”? Or are they right when they say their loan rates simply reflect their cost of funding?</p>
<h2>‘Profiteering’ isn’t straightforward</h2>
<p>My inquiries suggest that while there may indeed be some behaviour that could reasonably be described as profiteering, the banks’ complex funding arrangements explain much of their decisions not to pass on all of the past three interest rate cuts.</p>
<p>The <a href="https://www.rba.gov.au/education/resources/explainers/how-rba-implements-monetary-policy.html">cash rate</a> is the rate for overnight lending between banks, and while it ultimately influences all interest rates, overnight lending and borrowing is a very small part of bank funding. </p>
<p>Most of the funds banks lend come from deposits and wholesale borrowings. They are typically provided for months or years rather than nights.</p>
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<a href="https://theconversation.com/0-75-is-a-record-low-but-dont-think-for-a-second-the-reserve-bank-has-finished-cutting-the-cash-rate-124499">0.75% is a record low, but don't think for a second the Reserve Bank has finished cutting the cash rate</a>
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<p>The rates banks pay for these funds don’t necessarily change immediately or by the same amount as the cash rate. But even when they do, the average cost of funding for bank loans changes much more slowly because it also includes the cost of funding taken out at earlier rates, until that funding is replaced by new funding taken out at new rates.</p>
<p>So the banks’ argument that their funding costs don’t move with the cash rate has theoretical merit.</p>
<p>But how can we assess whether it is valid in practice?</p>
<h2>The figures cast doubt on the “profiteering” claim</h2>
<p>One way is to look at the behaviour of the net interest margin (NIM) of the banks. This is the difference between the amount of interest they earn on loans and other investments over and above the interest they pay on their funding, expressed as a percentage of their interest-earning assets. </p>
<p>If they are “profiteering” by not reducing loan rates in line with funding costs, the NIM should increase. Has this happened? </p>
<p>The figures suggest not – although they are not published frequently enough to give a definitive figure for developments over the past few months. Note also that there are always other factors influencing the NIM. A shift into higher risk-lending, for example, could be expected to see an increase in the NIM to reflect higher loan rates charged for greater risk.</p>
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<p><strong>Net interest margins of the big four</strong></p>
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<a href="https://images.theconversation.com/files/296330/original/file-20191010-188835-iefp4n.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/296330/original/file-20191010-188835-iefp4n.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/296330/original/file-20191010-188835-iefp4n.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=342&fit=crop&dpr=1 600w, https://images.theconversation.com/files/296330/original/file-20191010-188835-iefp4n.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=342&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/296330/original/file-20191010-188835-iefp4n.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=342&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/296330/original/file-20191010-188835-iefp4n.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=430&fit=crop&dpr=1 754w, https://images.theconversation.com/files/296330/original/file-20191010-188835-iefp4n.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=430&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/296330/original/file-20191010-188835-iefp4n.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=430&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">100 basis points = 1 percentage point.</span>
<span class="attribution"><span class="source">KPMG analysis from ANZ, CBA, NAB and WBC half yearly reports</span></span>
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<h2>But the figures aren’t conclusive</h2>
<p>The net interest margins of the big four have fallen markedly since 2010 and appear to have plateaued. </p>
<p>But that needn’t mean home borrowers are getting better deals.</p>
<p>The banks might be widening their margins on highly profitable home loans while narrowing them on others.</p>
<p>And even small changes in net interest margins (the kind not easily seen on graphs) can generate large dollar sums of the sort the banks need to offset the seemingly ever-mounting costs of compensation and fines resulting from the banking royal commission.</p>
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Read more:
<a href="https://theconversation.com/sam-and-the-honest-broker-why-commissioner-hayne-wants-mortgage-brokers-to-charge-fees-114071">Sam and the honest broker: why Commissioner Hayne wants mortgage brokers to charge fees</a>
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<p>The difficulty of reaching a conclusion is compounded by the abundance of mortgage loan rates, such that it is the “headline” variable rate which attracts media and public attention, but which not all new borrowers pay. </p>
<p>Most banks offer significant discounts to new customers who are savvy enough to bargain and are good credit risks. There is not enough good contemporaneous information about what banks are charging these customers.</p>
<p>This isn’t to say that changes in the headline rate are unimportant. Headline rates are especially important because they apply to the mass of “back book” (existing) mortgage customers who are slow to rebargain or refinance.</p>
<h2>Both headline and discounted rates matter</h2>
<p>Changes in rates on the back book matter much more for bank profits than changes in rates on the front book (new borrowers). They adjust in line with the headline rate, the ones the politicians and bank critics notice.</p>
<p>Unfortunately for those existing borrowers, those rates move slowly because they depend on the banks’ past funding costs. They are funded from a mix of short term and other borrowings for terms of three months to several years.</p>
<p>Only as that existing funding matures and banks can refinance at lower rates can the average cost of their funds decline – and even then not generally by as much as the cash rate. Bank average funding costs are necessarily less variable than the cash rate, such that even over time after long lags we can’t necessarily expect their headline rates to track the cash rate.</p>
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Read more:
<a href="https://theconversation.com/cutting-interest-rates-is-just-the-start-its-about-to-become-much-much-easier-to-borrow-117500">Cutting interest rates is just the start. It's about to become much, much easier to borrow</a>
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<p>Of course, it would be foolish to rule out the possibility that the major banks, all wearing costs as a result of the royal commission, are attempting to recoup some of those costs by a less than complete pass-through of their average funding costs. </p>
<p>If they are, the offerings of alternative mortgage providers with different funding models will be become relatively more attractive and there will be more in it for customers who switch.</p>
<p>Ultimately, it’s customer awareness and action that will inhibit bank “profiteering”, far more than jawboning by politicians and the media.</p><img src="https://counter.theconversation.com/content/124874/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kevin Davis, like most Australians with superannuation and a share portfolio, hold shares in Australian banks.</span></em></p>Evidence for the prime minister’s contention that the banks are “profiteering” is thin on the ground.Kevin Davis, Professor of Finance, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.