tag:theconversation.com,2011:/au/topics/reserve-bank-17762/articlesReserve Bank – The Conversation2024-03-06T19:15:33Ztag:theconversation.com,2011:article/2240602024-03-06T19:15:33Z2024-03-06T19:15:33ZInterest rates are expected to drop but trying to out-think the market won’t guarantee getting a good deal<p><em>This article is part of The Conversation’s series examining the housing crisis. Read the other articles in the series <a href="https://theconversation.com/au/topics/housing-series-2024-153769">here</a>.</em></p>
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<p>With most economists expecting interest rates to start falling later this year, prospective home buyers might be weighing up whether to buy now for fear of strong competition for stock, or waiting until repayments are lower.</p>
<p>The financial markets and private sector economists expect the Reserve Bank to start cutting interest rates later this year. But the average forecaster is expecting just one cut in the next 12 months, of 0.25%.</p>
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<p>While rates have risen 13 times since May 2022, the drop won’t be so far nor so fast.</p>
<p>Even by the end of 2026 rates will probably only be around 1% lower than now.</p>
<p>And this may be as low as interest rates go. The interest rates we saw during the COVID recession were arguably the <a href="https://www.bankofengland.co.uk/-/media/boe/files/speech/2015/stuck.pdf">lowest in human history</a>. </p>
<p>We are highly unlikely to return to these lows.</p>
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<img alt="Graph of interest rates dating back to 1575, going down since 1975" src="https://images.theconversation.com/files/578495/original/file-20240228-18-jx645r.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/578495/original/file-20240228-18-jx645r.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=277&fit=crop&dpr=1 600w, https://images.theconversation.com/files/578495/original/file-20240228-18-jx645r.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=277&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/578495/original/file-20240228-18-jx645r.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=277&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/578495/original/file-20240228-18-jx645r.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=348&fit=crop&dpr=1 754w, https://images.theconversation.com/files/578495/original/file-20240228-18-jx645r.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=348&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/578495/original/file-20240228-18-jx645r.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=348&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="attribution"><a class="source" href="https://www.bankofengland.co.uk/-/media/boe/files/speech/2015/stuck.pdf">Bank of England</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
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<h2>Neutral interest rates</h2>
<p>In normal times, we would expect interest rates to be higher than inflation. People can reasonably expect to be compensated for delaying spending. The margin by which interest rates exceed inflation in the medium-term is known as the <a href="https://www.rba.gov.au/speeches/2022/sp-ag-2022-10-12.html">neutral real rate of interest</a>. </p>
<p>This Goldilocks rate would apply when the Reserve Bank is neither trying to squeeze inflation nor stimulate demand. </p>
<p>The Reserve has used <a href="https://www.rba.gov.au/speeches/2022/sp-ag-2022-10-12.html">nine different approaches</a> to estimate this neutral real rate. The average result is that it may have dropped from around 3% in the 1990s to around 1% in the 2020s.</p>
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<p>This is also around the <a href="https://www.bis.org/publ/qtrpdf/r_qt2403b.htm">average value estimated in comparable countries</a>. In these days of global financial markets, it could be expected that there would be similar trends across countries. The decline in the global neutral real rate may be due to a <a href="https://www.brookings.edu/articles/the-hutchins-center-explains-the-neutral-rate-of-interest/">reduction in the global economic growth rate associated with population ageing and higher global savings</a>.</p>
<p>The Reserve Bank aims for inflation to average around the midpoint of its <a href="https://www.rba.gov.au/education/resources/explainers/australias-inflation-target.html">2-3% target range</a>. So if the neutral real rate is around 1%, this would imply that the Reserve’s <a href="https://www.rba.gov.au/statistics/cash-rate/">cash rate</a> (at which banks lend to each other overnight) would be around 3.5%.</p>
<p>This is about what the forecasters are expecting by the end of 2026.</p>
<p>Commercial banks <a href="https://www.rba.gov.au/education/resources/explainers/banks-funding-costs-and-lending-rates.html">set the interest rates</a> they charge on their loans by adding a margin to the Reserve Bank’s cash rate.</p>
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Read more:
<a href="https://theconversation.com/the-help-to-buy-scheme-will-help-but-wont-solve-the-housing-crisis-224956">The Help to Buy scheme will help but won't solve the housing crisis</a>
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<p>They set the interest they pay on deposits by subtracting a margin from the cash rate. The difference between the two (and any fee income) meets the costs of running the bank such as wages and premises, allows for some loans not being repaid and provides some profits. The margins will be smaller if the banking market is very competitive.</p>
<p>Banks generally move their mortgage interest rates in line with the cash rate. If by the end of 2026 the cash rate is 1% lower, it is likely home loan interest rates will also be around 1% lower. This would reduce the monthly repayment on a 30-year loan for $1 million by $700.</p>
<h2>The impact of (somewhat) lower interest rates on house prices</h2>
<p>If the housing market is reasonably efficient, these broadly expected decreases in interest rates should largely be already “priced in” by investors. This would suggest relatively little impact as the expected cuts materialise.</p>
<p>But some potential homebuyers will be able to borrow more once interest rates drop. And many of them will choose to do so. They may then bid house prices up.</p>
<p>This is why <a href="https://theconversation.com/mortgage-and-inflation-pain-to-ease-but-only-slowly-how-31-top-economists-see-2024-218927">most economists are forecasting house prices to rise further</a> during 2024. The average expected increase is 5% in Sydney and 3% in Melbourne. </p>
<p>The increases are comparable to the expected rises in incomes so affordability will not significantly worsen. But buying a home will not be getting any easier.</p>
<p>A similar pattern of expected easing interest rates leading to higher house prices is being observed <a href="https://www.ft.com/content/b6d89def-aea4-4790-9ff5-cddf32f3b36c">around the world</a>.</p>
<p>Renters may be hoping landlords will pass on interest rate decreases to them. But they are likely to be disappointed. Rents have risen not due to interest rate rises but because the vacancy rate is low. With strong population growth, this is unlikely to change soon.</p>
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Read more:
<a href="https://theconversation.com/urbanisation-and-tax-have-driven-the-housing-crisis-its-hard-to-see-a-way-back-but-covid-provides-an-important-lesson-223548">Urbanisation and tax have driven the housing crisis. It's hard to see a way back but COVID provides an important lesson</a>
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<h2>What to do?</h2>
<p>Trying to out-think the market is unlikely to work.</p>
<p>Not buying your dream home and instead waiting for a drop in interest rates may be a mistake. But so might panic-buying something that’s not what you want out of fear of further rises in house prices.</p><img src="https://counter.theconversation.com/content/224060/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Hawkins was formerly a senior economist at the Reserve Bank and the Australian Treasury and was secretary to the Senate Select Committee on Housing Affordability in Australia in 2008.</span></em></p><p class="fine-print"><em><span>Craig Applegate 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>Despite different theories, there is no simple answer to whether prospective home buyers are better off buying before or after the expected interest rate drop in the next year.John Hawkins, Senior Lecturer, Canberra School of Politics, Economics and Society, University of CanberraCraig Applegate, Assistant Professor, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2200382023-12-19T19:02:10Z2023-12-19T19:02:10ZInterest rates will eventually fall but it’s a bit early for borrowers to break out the champagne<figure><img src="https://images.theconversation.com/files/566491/original/file-20231219-19-b7zt40.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Shutterstock</span> </figcaption></figure><p>Suddenly the talk in <a href="https://www.ft.com/content/0e7c2224-fa5b-45fc-b598-88010a912a97?desktop=true&segmentId=d8d3e364-5197-20eb-17cf-2437841d178a#myft:notification:instant-email:content">global financial markets</a> has spun from “when will interest rates next rise?” to “how soon before they fall?”.</p>
<p>Some commentators are flagging the shift as a “<a href="https://www.youtube.com/watch?v=VJGd7ZC6xXk">pivot party</a>”.</p>
<p>This change has been most prominent in the United States. It was prompted by the Federal Reserve, the US equivalent of the Reserve Bank of Australia, releasing its latest “dot chart”. This shows most members of its policy-setting Federal Open Market Committee expect their interest rate would be lower by the end of 2024.</p>
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<img alt="FOMC participants’ assessments of appropriate monetary policy" src="https://images.theconversation.com/files/566454/original/file-20231219-27-x9107x.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/566454/original/file-20231219-27-x9107x.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/566454/original/file-20231219-27-x9107x.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/566454/original/file-20231219-27-x9107x.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/566454/original/file-20231219-27-x9107x.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/566454/original/file-20231219-27-x9107x.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/566454/original/file-20231219-27-x9107x.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&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="attribution"><a class="source" href="https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20231213.htm">US Federal Reserve</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
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<p>The recent <a href="https://rbareview.gov.au/">review of the Reserve Bank</a> in Australia wanted more transparency. But, after the whacking former Governor Phil Lowe got when he wrongly predicted rates would stay low until “at least” 2024, I doubt his successor Michele Bullock will be keen to publish a similar chart. </p>
<p>Even so, financial markets in Australia are also now implying interest rates will fall over the course of next year.</p>
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<h2>The latest indicators</h2>
<p>The Australian economy has continued to slow according to the latest <a href="https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-national-income-expenditure-and-product/latest-release">national accounts</a>. Consumer spending did not increase at all in the September quarter, despite an increase in population. Exports contracted. Overall GDP grew by a mere 0.2%.</p>
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<p>The <a href="https://www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-force-australia/latest-release">news from the labour market</a> was mixed. There was a solid rise in employment in November. The hours worked data, however, have been basically flat for the past six months.</p>
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<p>The government maintained fiscal discipline in the <a href="https://theconversation.com/theres-a-glimmer-of-hope-in-the-mid-year-budget-update-but-inflation-is-still-a-big-challenge-219611">mid-year</a> budget update released last week. They saved rather than spent almost all the extra revenue from higher than expected commodity prices.</p>
<p>The <a href="https://www.rba.gov.au/monetary-policy/rba-board-minutes/2023/2023-12-05.html">minutes</a> of the Reserve’s latest meeting on December 5 show the board noted “encouraging signs of progress” in returning inflation to the target.</p>
<p>Subsequent events have suggested inflation will likely continue on its downward trajectory, which means the Reserve has increased interest rates enough.</p>
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<p>Another development since the Reserve last met is an update of the
<a href="https://www.rba.gov.au/monetary-policy/framework/stmt-conduct-mp-8-2023-12-08.html">Statement on the Conduct of Monetary Policy</a> between Treasurer Jim Chalmers and the board. This sets out the common understanding between them about Australia’s monetary policy framework.</p>
<p>Much of this statement carries over the existing framework. The bank’s primary tool is its cash rate target and it is varied to achieve a medium-term inflation target of 2-3%. Employment considerations influence how quickly it is regained when shocks move inflation away from it.</p>
<p>The statement explicitly refers to the midpoint of the target, reflecting a suggestion in the recent <a href="https://rbareview.gov.au/">Reserve Bank review</a>. Some <a href="https://www.afr.com/policy/economy/rba-dual-mandate-tweak-could-mean-higher-rates-for-longer-20231208-p5eq1q#:%7E:text=Treasurer%20Jim%20Chalmers%20has%20axed,rates%20stay%20higher%20for%20longer.">commentators have interpreted</a> this as indicating the bank cannot cut rates as its <a href="https://www.rba.gov.au/publications/smp/2023/nov/pdf/05-economic-outlook.pdf">forecast for inflation</a> only has it reaching the top, not the middle, of the range by the end of 2025.</p>
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Read more:
<a href="https://theconversation.com/the-7-charts-that-show-australians-struggling-as-saving-falls-to-near-zero-218924">The 7 charts that show Australians struggling as saving falls to near zero</a>
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<p>I disagree. The bank has always aimed at the midpoint of the target as the most likely way to ensure inflation averages within it. If the board was happy at its December meeting to have reached 3% by the end of 2025 on its way to achieving 2.5% later, there is no reason for it to change this view in February.</p>
<h2>So what will the Reserve Bank do?</h2>
<p>On balance, the economic news does not suggest the Reserve Bank will feel a need to raise rates in February. But with inflation still high, and plenty of uncertainty, they are unlikely to cut rates any time soon. The bank does not generally make sharp U-turns with the average gap between the last interest rate increase in a cycle and the first cut being ten months.</p>
<p>At its next meeting, on <a href="https://www.rba.gov.au/media-releases/2023/mr-23-18.html">February 5-6</a>, the Reserve board may have a new member, deputy governor <a href="https://theconversation.com/meet-andrew-hauser-the-outsider-from-the-uk-wholl-be-deputy-governor-of-the-rba-217521">Andrew Hauser</a>, and a new adviser, chief economist <a href="https://www.rba.gov.au/media-releases/2023/mr-23-36.html">Sarah Hunter</a>. They share a British background so will be familiar with the Bank of England model, which influenced the <a href="https://www.theguardian.com/commentisfree/2023/apr/21/the-reserve-bank-review-is-not-revolutionary-and-thats-a-good-thing">Reserve Bank review</a>. </p>
<h2>The impact of (eventual) lower interest rates</h2>
<p>The movements in the Reserve Bank’s interest rate matters most to the third of households with a mortgage. Most of these have variable rate loans where the interest rate closely follows that set by the Reserve. An interest rate cut would ease the cost-of-living pressures they have been facing. </p>
<p>A household with the <a href="https://www.abs.gov.au/statistics/economy/finance/lending-indicators/latest-release">average loan size of around A$600,000</a> would have seen their monthly repayments rise by almost $1,700 since early 2022. This would drop by $100 if rates were cut by 0.25%.</p>
<p>While the impact on mortgagees always gets the most attention, interest rates affect other members of the community too.</p>
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Read more:
<a href="https://theconversation.com/will-the-rba-raise-rates-again-unless-prices-surge-over-summer-its-looking-less-likely-219197">Will the RBA raise rates again? Unless prices surge over summer, it's looking less likely</a>
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<p>Lower interest rates mean a lower income to retirees dependent on interest on their savings. They tend to boost the prices of assets such as shares and houses. They encourage borrowing and spending and reduce incentives to save. They tend to lower the exchange rate, making imports more expensive for Australians but our exports cheaper to foreigners. The net impact is generally to lower unemployment.</p>
<p>A lot of people are therefore looking forward to an interest rate cut. But they should not be holding their breath.</p>
<p>Financial markets may be getting prematurely excited. The last thing the Reserve Bank would want is to find themselves having lowered rates too quickly and see inflation turn back up, necessitating the interest rate cut to be reversed. More likely, they will wait for inflation to drop much closer to their target before there is any easing of interest rates.</p><img src="https://counter.theconversation.com/content/220038/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Hawkins is a former senior economist at the Reserve Bank and has worked as an economic forecaster at the Bank for International Settlements and the Australian Treasury.</span></em></p>A lot of Australians are hoping there might be an interest rate cut at the next Reserve Bank board meeting but they shouldn’t hold their breath.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/2154462023-10-16T19:06:06Z2023-10-16T19:06:06ZThe move to a cashless society isn’t just a possibility, it’s well underway<figure><img src="https://images.theconversation.com/files/553818/original/file-20231015-19-kwyha0.jpg?ixlib=rb-1.1.0&rect=74%2C0%2C5811%2C3902&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/customer-scanning-tag-coffee-shop-pay-1868918989">Shutterstock</a></span></figcaption></figure><p>When was the last time you used cash? For many Australians using cash or even swiping a card has become a rare event.</p>
<p>The move towards a cashless society started 50 years ago with the introduction of the Bankcard and was driven by technological advancements. But it really took off with the COVID pandemic when consumers and retailers were reluctant to handle potentially infected notes and coins.</p>
<p>The federal government last week underscored its recognition of this trend by <a href="https://ministers.treasury.gov.au/ministers/jim-chalmers-2022/media-releases/modernising-payments-regulation">unveiling reforms</a> to regulate digital payment providers. Treasurer Jim Chalmers said:</p>
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<p>As payments increasingly become digital, our payments system needs to remain fit for purpose so that it delivers for consumers and small businesses. We want to make sure the shift to digital payments occurs in a way that promotes greater competition, innovation and productivity across our entire economy.</p>
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<p>From big cities to remote rural corners the shift towards digital payments is evident. This raises the question, is a cashless society inevitable?</p>
<h2>The phenomenal growth of the digital payments</h2>
<p>The convenience of digital transactions has become irresistible for consumers and businesses and has led to the sector eclipsing traditional payment methods.</p>
<p>The relentless march of technology has produced myriad innovative platforms from mobile wallets to buy-now-pay-later (BNPL) schemes, each vying for a piece of this burgeoning market.</p>
<p>A recent <a href="https://www.ausbanking.org.au/wp-content/uploads/2023/06/Bank-On-It-%E2%80%93-Customer-Trends-2023-1.pdf">report</a> by the Australian Banking Association paints a vivid picture of the digital payment industry’s explosive expansion.</p>
<p>The use of digital wallet payments on smartphones and watches has soared from $746 million in 2018 to over $93 billion in 2022. Cash only accounts for 13% of consumer payments in Australia as of the end of 2022, a stark contrast to 70% in 2007.</p>
<p>Digital wallets are popular with most age groups. Young Australians aged between 18 and 29 are leading the pack, with two thirds <a href="https://www.rba.gov.au/publications/bulletin/2023/jun/consumer-payment-behaviour-in-australia.html">using digital wallets</a> to pay for goods and services. </p>
<p>About <a href="https://www.ausbanking.org.au/almost-40-leave-wallets-at-home/">40% of Australians</a> are comfortable leaving home without their actual wallets or even credit or debit cards, as long as they have their mobile devices with digital wallets.</p>
<p>The astonishing speed at which Australians have embraced digital payments places the country among the top users of cashless payments globally, surpassing the United States and European countries.</p>
<p>Digital wallets are not the only players in this space. The use of BNPL products is also growing rapidly in Australia, which was where many of the large-scale products in this category started.</p>
<p>The Australian Securities and Investment Commission (ASIC) reports the total value of all BNPL transactions increased by <a href="https://asic.gov.au/regulatory-resources/find-a-document/reports/rep-672-buy-now-pay-later-an-industry-update/">79% in the 2018–19 financial year</a>. This continues into 2022 with an annual growth beyond 30% according to the <a href="https://www.rba.gov.au/publications/annual-reports/psb/2022/the-evolving-retail-payments-landscape.html">Reserve Bank of Australia</a> (RBA).</p>
<p>PayID and PayPal payments are also claiming their shares in this space. </p>
<h2>Are government regulations necessary?</h2>
<p>The government’s planned regulation of the system, contained in amendments to the Reforms to the Payment Systems (Regulation) Act 1998, is a big step towards establishing a secure and trustworthy cashless society in Australia.</p>
<p>It will subject BNPL and digital wallet service providers like Apple Pay and Google Pay to the same oversight by the RBA as traditional credit and debit cards.</p>
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Read more:
<a href="https://theconversation.com/no-spare-change-how-charities-buskers-and-beggars-arent-feeling-so-festive-in-our-cashless-society-151024">No spare change: how charities, buskers and beggars aren’t feeling so festive in our cashless society</a>
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<p>The regulations will require providers meet clear standards for security measures, data protection and dispute resolution to give Australians confidence their funds and personal information are safeguarded.</p>
<p>With increasing concern over cyber attacks, the regulations will help reduce the risk of fraudulent activities and money laundering and help identify suspicious transactions, maintaining the integrity of the financial system. </p>
<p>Also, regulation will promote fair competition and market stability by levelling the playing field and by preventing monopolies.</p>
<p>While banks support the forthcoming regulation, new market players are less positive. For example, Apple Pay says it is merely <a href="https://www.afr.com/companies/financial-services/new-rba-powers-to-regulate-apple-google-payments-20231010-p5eb6d">providing technical architecture</a> rather than payment services. </p>
<p>The current regulatory debate is not new. When credit cards made their debut in Australia in the early 1970s, there were hardly any safeguards for consumers. This led to card users being hit with high interest rates on money owed, sneaky fees and aggressive marketing tactics.</p>
<p>Consequently, regulations were introduced to hold card providers to a standard of responsible behaviour. Today, they must openly disclose interest rates, fees and charges, and follow stringent guidelines in advertising their products and services.</p>
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<strong>
Read more:
<a href="https://theconversation.com/chinas-experience-with-mobile-payments-highlights-the-pros-and-cons-of-a-cashless-society-201177">China's experience with mobile payments highlights the pros and cons of a cashless society</a>
</strong>
</em>
</p>
<hr>
<p>Regulating digital wallet providers strikes a crucial balance between innovation and accountability, ensuring life-changing technology continues to serve the public interest.</p>
<p>The shift towards a cashless society in Australia isn’t just a possibility, it’s already well underway.</p>
<p>The blend of technological advancements, changing consumer preferences and regulatory adaptations has set the stage for this transformation. The new regulations will help Australians navigate this transition more confidently.</p><img src="https://counter.theconversation.com/content/215446/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Angel Zhong 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>Regulating the increasingly popular digital payment providers will bring them into line with other payment services and help protect consumers.Angel Zhong, Associate Professor of Finance, RMIT UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2098522023-07-26T05:47:17Z2023-07-26T05:47:17ZUnderlying inflation has slipped below 6%, but is the slide enough to stop the RBA pushing up rates further?<figure><img src="https://images.theconversation.com/files/539431/original/file-20230726-19-z0n0t9.png?ixlib=rb-1.1.0&rect=335%2C437%2C3640%2C1952&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>Australia’s inflation rate has fallen for the second consecutive quarter.</p>
<p>After reaching a 30-year high of 7.8% at the end of 2022, annual inflation as measured by the Bureau of Statistics’ quarterly <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release">Consumer Price Index</a> slid to 7% in the March quarter of 2023, and fell further to 6% in the June quarter.</p>
<hr>
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<p>The quarterly results are consistent with the newer <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/monthly-consumer-price-index-indicator/latest-release">monthly measure of annual inflation</a> which has also been falling since hitting a high of 8.4% in December. </p>
<p>The monthly measure slid to 5.4% in June. </p>
<hr>
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<hr>
<p>Helping bring inflation down were state government electricity rebates and cuts in the prices some households paid for medicines. </p>
<p>The prices of new dwellings grew more slowly as demand eased and problems with the supply of materials improved. </p>
<p>Conversely, there were sharp increases in the prices of insurance and some other financial services. </p>
<p>The bureau’s measure of rents (which covers rents paid in distinction to more widely quoted measures of rents advertised) grew by 6.7% in the year to June, up from 4.9% in the year to March, and the most since 2009.</p>
<hr>
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<hr>
<h2>Underlying inflation down</h2>
<p>To get a better idea of what would be happening were it not for some of these unusual and outsized moves, the bureau 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>This 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 measure, closely watched by the Reserve Bank, is also falling and is now 5.9%.</p>
<hr>
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<hr>
<p>The fall in Australia’s inflation is in line with falls in other Western nations including the United States, Canada and the United Kingdom. They have been brought about by an easing of supply bottlenecks and slowing economic activity in response to increases in interest rates. </p>
<p>An exception is China, which has almost no inflation.</p>
<hr>
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<hr>
<p>Much of the slide in Australia’s inflation rate reflects weaker economic growth.</p>
<p>The economy grew only 0.2% in the March quarter. The Reserve Bank believes it grew by <a href="https://www.rba.gov.au/monetary-policy/rba-board-minutes/2023/2023-07-04.html">only that much again</a> in the June quarter.</p>
<figure class="align-right zoomable">
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<figcaption>
<span class="caption">Treasurer Chalmers, keen to highlight the role of budget measures.</span>
<span class="attribution"><span class="source">AAP</span></span>
</figcaption>
</figure>
<p>Treasurer Jim Chalmers was keen to highlight the role of his budget cost-of-living package which he said would help with rent, energy bills and childcare.</p>
<p>Many common medicines would become cheaper from September as a result of the government’s decision to allow some people to buy two months’ worth of supply for the price of a single prescription.</p>
<p>Chalmers said inflation was only 0.8% in the June quarter itself, less than half the rate of the quarterly peak in the March quarter of 2022, just before the 2022 election.</p>
<p>While he would prefer inflation to be falling more quickly, Australia was “making progress”.</p>
<h2>What does it mean for my mortgage?</h2>
<p>The 6% inflation rate is <em>lower</em> than the 6.3% <a href="https://www.rba.gov.au/publications/smp/2023/may/pdf/forecast-table-2023-05.pdf">forecast</a> for June in the Reserve Bank’s <a href="https://www.rba.gov.au/publications/smp/2023/may/">Statement of Monetary Policy</a> released in May, although that forecast assumed a lower cash rate than the 4.1% the bank lifted its cash rate to in June.</p>
<p>This makes it look as if inflation is falling fast enough to reach the bank’s 2-3% target band by mid-2025, which is a pace the bank had said was acceptable. </p>
<p>Outgoing governor Phil Lowe <a href="https://www.rba.gov.au/speeches/2023/sp-gov-2023-04-05-q-and-a-transcript.html">defended</a> that pace in April, saying </p>
<blockquote>
<p>if we can get inflation back to 3% by mid-2025 and preserve many of those job gains that have been delivered in the last few years, that’s a better outcome than getting inflation back to 3% one year earlier and having more job losses.</p>
</blockquote>
<p>Incoming governor Michele Bullock has <a href="https://www.rba.gov.au/speeches/2023/sp-dg-2023-06-20.html">also</a> argued a faster return to target would likely mean unnecessary job losses, saying: </p>
<blockquote>
<p>our judgement is that if we can return inflation to target in a reasonable timeframe – while preserving as many of the employment gains as we can – that would be a better outcome.</p>
</blockquote>
<p>Today’s news does not suggest the bank needs to lift rates further. It shows it is still on what Lowe calls the “<a href="https://www.rba.gov.au/speeches/2023/sp-gov-2023-06-07.html">narrow path</a>” to getting things right.</p>
<hr>
<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>
</strong>
</em>
</p>
<hr>
<p>It is possible that the broad-based increases in the inflation rate for services, driven in part by faster wage growth, might be a concern for the bank. And it is possible the present low unemployment rate could push up wages growth further. </p>
<p>The bank will be scanning reports from its <a href="https://www.rba.gov.au/publications/bulletin/2014/sep/pdf/bu-0914-1.pdf">business liaison program</a> for clues.</p>
<p>But it is likely to take comfort from the fact inflation is falling as it expected it to, and at about the expected pace. It will meet to discuss rates next Tuesday.</p>
<p>It certainly isn’t likely to cut rates for quite some time. At 6%, inflation remains well above its 2-3% target.</p><img src="https://counter.theconversation.com/content/209852/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Hawkins was formerly an economic analyst and forecaster in the Reserve Bank and Treasury,
He has a bet with a colleague about whether the Bank will raise rates further; the stake is $2.</span></em></p>Inflation has slipped faster than the Reserve Bank thought it would, and the underlying rate is down to 5.4%. The bank is likely to tread cautiously 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/2060682023-06-07T07:39:01Z2023-06-07T07:39:01ZGoing down: the 6 graphs that show economic growth shrinking<figure><img src="https://images.theconversation.com/files/530549/original/file-20230607-21-8nixs9.png?ixlib=rb-1.1.0&rect=437%2C419%2C3173%2C1640&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://unsplash.com/@smalltown_boy">BagzhanSadvakassov/Upsplash</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>The latest national accounts tell us Australia’s economy grew by just <a href="https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-national-income-expenditure-and-product/mar-2023">0.2%</a> in the three months to March.</p>
<p>It’s the weakest growth since the economy shrank during the COVID lockdowns, and, before that, the weakest economic growth since December 2018.</p>
<p>If economic growth continued at that pace for four quarters, the annual rate would be 0.8%, the weakest outside of a recession.</p>
<p>And the quarterly pace is shrinking. Economic activity grew 0.8% in the June quarter of 2022, 0.6% in the September and December quarters, and most recently, in the March quarter, only 0.2%.</p>
<hr>
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<hr>
<p>The earlier stronger growth means gross domestic product is 2.3% larger than a year ago, a figure that looks set to become the highest for some time, but which looks less impressive when set aside the 2% growth in population. </p>
<p>Per person, gross domestic product shrank by 0.2%, the most outside of a COVID lockdown period since 2016.</p>
<hr>
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<hr>
<p>The main drivers of economic growth were business investment and exports of services.</p>
<p>But there was weakness in consumer spending, with spending on discretionary items slipping.</p>
<p>Households were only able to increase their essential spending (on things such as fuel, transport and rent) by saving less. Australia’s household saving ratio, the proportion of income saved, fell to just 3.7% – the least since 2008.</p>
<hr>
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<hr>
<p>Mortgage interest expenses doubled over the year to the March quarter, and dwelling investment fell by 1.2% in the quarter, and 4.4% over the year.</p>
<p>Business investment increased, climbing 2.4% in the quarter, but much of it was imported capital equipment, which detracted from GDP. Exports increased, with the return of international students to Australian campuses an important contributor. </p>
<h2>Who is getting what national income there is?</h2>
<p>There has been some debate about how the national pie is being shared. Related is an argument about whether it is greedy businesses or greedy workers that are responsible for higher inflation. </p>
<p>Australian Council of Trades Unions Secretary Sally McManus <a href="https://www.abc.net.au/news/2022-08-23/fact-check-sally-mcmanus-labour-s-share-of-gdp/101357044">points out</a> that labour’s share of GDP is near its lowest since the quarterly national accounts began in 1959. The profit share is near its highest.</p>
<hr>
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<hr>
<p>The Australia Institute has <a href="https://australiainstitute.org.au/report/profits-and-inflation-in-mining-and-non-mining-sectors/">argued</a> that most of the current excess inflation is attributable to higher corporate profits, an assessment that has been critiqued by the <a href="https://www.rba.gov.au/publications/smp/2023/may/box-b-have-business-profits-contributed-to-inflation.html">Reserve Bank</a> and <a href="https://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22committees%2Festimate%2F26986%2F0000%22">Treasury</a>. </p>
<p>Much of the overall increase in the profit share is attributable to the mining sector. </p>
<p>The profit share in mining is around the highest in at least two decades, due almost entirely to higher commodity prices since Russia invaded Ukraine. </p>
<p>In the rest of the economy, the profit share is not exceptional. </p>
<hr>
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<hr>
<h2>What does it mean for your mortgage?</h2>
<p>Inflation appears to have peaked around the end of 2022, but the Reserve Bank is hyper-alert to any sign that inflation may not be declining towards its 2-3% target as rapidly as it would like. </p>
<p>Its <a href="https://www.rba.gov.au/publications/smp/2023/may/economic-outlook.html">most recent forecasts</a> published in May (which assumed no further increases in interest rates) envisaged inflation returning to 3% by mid-2025. </p>
<p>Governor Philip Lowe’s <a href="https://www.rba.gov.au/monetary-policy/rba-board-minutes/2023/2023-04-04.html">statement</a> following Tuesday’s board meeting suggests such a path is the slowest return to the bank’s target he will accept – the “<a href="https://www.rba.gov.au/speeches/2023/sp-gov-2023-06-07.html">narrow path</a>” he spoke about Wednesday morning.</p>
<hr>
<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>
</strong>
</em>
</p>
<hr>
<p>Lowe <a href="https://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22committees%2Festimate%2F26912%2F0000%22">believes</a> the net impact of the budget, the main economic event last month, was to <em>reduce</em> inflationary pressures.</p>
<p>Despite this, his board <a href="https://www.rba.gov.au/media-releases/2023/mr-23-13.html">lifted interest rates again</a> at its meeting this week.</p>
<p>The bank’s forecasts have annual economic growth slowing from 2.7% at the end of 2022 to 1.75% by mid-2023.</p>
<p>Today’s data is in line with that forecast, and so should not put any more pressure on the bank to increase interest rates further.</p>
<p>Its longer-term concern is labour productivity. Real GDP per hour worked has barely increased over the past few years. Lowe says this makes wage increases <a href="https://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22committees%2Festimate%2F26912%2F0000%22">more likely</a> to add to inflation and reduces the leeway he has to hold off on pushing up rates.</p><img src="https://counter.theconversation.com/content/206068/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Hawkins formerly worked as a senior economist for the Reserve Bank and Australian Treasury.
</span></em></p>Per person, gross domestic product shrank 0.2% in the three months to March, the most outside of a COVID downturn since 2016.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/2041392023-04-20T00:18:21Z2023-04-20T00:18:21ZRBA revolution: how Chalmers will recraft the bank for the 21st century<p>The review into the Reserve Bank of Australia has just been published by Treasurer Jim Chalmers, and it’s a <a href="https://rbareview.gov.au/final-report">blockbuster</a>.</p>
<p>The review has made 51 recommendations including: </p>
<ul>
<li><p>taking away power over interest rates from the Reserve Bank board (which has traditionally been dominated by non-economists, usually corporate executives) and devolving it to a panel of experts</p></li>
<li><p>reducing the number of decision-making meetings from 11 to eight per year</p></li>
<li><p>boosting the transparency of its decision-making process and holding it more accountable for those decisions. </p></li>
</ul>
<p>Chalmers offered in-principle agreement to all 51 of the panel’s recommendations and said he would be seeking support from the Opposition for any legislation needed to implement them. The review has briefed Opposition Treasury spokesman Angus Taylor on its thinking.</p>
<p>Chalmers set up the <a href="https://ministers.treasury.gov.au/ministers/jim-chalmers-2022/media-releases/review-reserve-bank">three-person review</a> in July 2022, appointing Carolyn Wilkins, a former senior deputy governor of the Bank of Canada, Renée Fry-McKibbin, of the Crawford School of Public Policy at the Australian National University, and
Gordon de Brouwer, a specialist in public sector reform.</p>
<h2>What was the problem?</h2>
<p>While the apparent nature of the problem has changed over time, its root cause remains the same.</p>
<p>When the concept of the review was first mooted in 2020, the economy was in a bad state with inflation well below the bank’s target band of 2-3% and economic growth anaemic. </p>
<p>As a result, wage growth was too low and unemployment too high. </p>
<p>The most likely explanation is that the bank was focused too much on stabilising the financial system and too little on boosting the economy.</p>
<p>The bank was setting interest rates using its gut instead of its brain, in an almost literal sense – it was not doing what its computer model <a href="https://theconversation.com/the-rbas-failure-to-cut-rates-faster-may-have-cost-270-000-jobs-185381">suggested it should do</a>.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/521977/original/file-20230419-24-2xae0m.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/521977/original/file-20230419-24-2xae0m.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/521977/original/file-20230419-24-2xae0m.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=966&fit=crop&dpr=1 600w, https://images.theconversation.com/files/521977/original/file-20230419-24-2xae0m.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=966&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/521977/original/file-20230419-24-2xae0m.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=966&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/521977/original/file-20230419-24-2xae0m.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1215&fit=crop&dpr=1 754w, https://images.theconversation.com/files/521977/original/file-20230419-24-2xae0m.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1215&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/521977/original/file-20230419-24-2xae0m.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1215&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://rbareview.gov.au/">RBA Review</a></span>
</figcaption>
</figure>
<p>As the inquiry started, the problem had flipped. Inflation was too high.</p>
<p>But the underlying problem – that the board was populated by monetary policy amateurs rather than experts – remained the same.</p>
<p>The review concluded that monetary policy is a complex area of public policy and is best run by a team of experts who are highly informed about the current state of the economy.</p>
<p>Just as we have the country’s smartest legal minds on the High Court of Australia and our best health practitioners setting vaccine policy, it felt we should have Australia’s best macroeconomic minds running monetary policy at the Reserve Bank of Australia.</p>
<p>This lack of reliance on expertise might help explain why the bank made the ill-fated decision to indicate that interest rates would remain near 0% <a href="https://www.rba.gov.au/monetary-policy/reviews/approach-to-forward-guidance/index.html">until 2024</a>.</p>
<p>During the pandemic, bank staff explicitly recommended against forecasting how long interest rates would remain at 0%.</p>
<p>But the bank board ignored this advice and instead set out a three-year projection for how long rates would stay low.</p>
<p>When the economy recovered far quicker than expected and interest rates had to rise, many Australians interpreted the about-face as a broken promise.</p>
<hr>
<p>
<em>
<strong>
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>
</strong>
</em>
</p>
<hr>
<h2>Culture club</h2>
<p>The review says former and current staff have told it the bank’s culture is hierarchical and risk-averse.</p>
<p>It is obviously less than ideal to have an important institution in which diversity of thought is discouraged and staff feel unable to speak up.</p>
<p>Accordingly, the review has recommended that the bank improve its culture by appointing a chief operating officer with a mandate to open up the bank up to new ideas and staff and break down silos within the bank.</p>
<h2>What’ll this mean for rates?</h2>
<p>Whatever is changed as a result of the review, there are unlikely to be significant changes to its current approach of keeping interest rates relatively high.</p>
<p>Rates will remain high for as long as inflation is projected to stay above the 2-3% target band. The latest official inflation reading was 7.8%. It will be updated next Wednesday.</p>
<p>The review considered whether or not the 2-3% target remains optimal and concluded that it does. It considered alternatives such as a higher inflation target or targeting nominal gross domestic product, and found them lacking.</p>
<p>It recommends that a new monetary policy board meet eight times a year, rather than the 11 times the present board meets. It says this will give the external expert members of the board greater scope to “do deeper and better preparatory work for
each meeting”, helping them make better decisions.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/521988/original/file-20230420-2867-hm4792.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/521988/original/file-20230420-2867-hm4792.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/521988/original/file-20230420-2867-hm4792.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=838&fit=crop&dpr=1 600w, https://images.theconversation.com/files/521988/original/file-20230420-2867-hm4792.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=838&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/521988/original/file-20230420-2867-hm4792.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=838&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/521988/original/file-20230420-2867-hm4792.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1053&fit=crop&dpr=1 754w, https://images.theconversation.com/files/521988/original/file-20230420-2867-hm4792.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1053&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/521988/original/file-20230420-2867-hm4792.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1053&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.</span>
<span class="attribution"><span class="source">Mick Tsikas/AAP</span></span>
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</figure>
<h2>What about RBA Governor Philip Lowe?</h2>
<p>A review that found the bank was in good working order would have been a good reason to reappoint the present governor, whose five-year term ends in September.</p>
<p>The scale of the changes recommended by the review is large – there is an entire section devoted to a year-long implementation process.</p>
<p>The government might well decide that Lowe is the right person to carry out that process and that his term should be extended rather than dropping his successor into the middle of it.</p>
<p>However Chalmers plans to handle it, the review he commissioned has ushered in a revolution at the bank – one that will hopefully make it stronger, smarter and better-placed to serve the Australian people.</p><img src="https://counter.theconversation.com/content/204139/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>Just as we have the country’s smartest legal minds on the High Court and our best health practitioners setting vaccine policy, the review wants the best economists to set monetary policy.Isaac Gross, Lecturer in Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2002652023-02-21T04:55:05Z2023-02-21T04:55:05ZSee when Australia’s biggest banks stopped paying proper interest on your savings – and what you can do about it<figure><img src="https://images.theconversation.com/files/511334/original/file-20230221-24-soramb.png?ixlib=rb-1.1.0&rect=0%2C785%2C3389%2C1435&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>Whenever interest rates went up in the past, I used to get told it wasn’t all bad news. At least it was good for some people: savers – people with money in the bank.</p>
<p>I hear a lot less of that these days.</p>
<p>If you’ve got money in the bank, you’re now lucky to earn anything at all. One in seven of the deposit dollars held by the Commonwealth bank (Australia’s biggest for deposits) is in a “transaction account” on which it <a href="https://images.theconversation.com/files/511239/original/file-20230220-18-uyzffw.PNG">no longer pays interest</a>. </p>
<p>Where interest is paid, it is so tiny compared to what it was that Treasurer Jim Chalmers this month directed the Australian Competition and Consumer Commission to conduct an <a href="https://www.accc.gov.au/media-release/accc-launches-inquiry-into-deposit-interest-rates">inquiry</a>, using its compulsory information-gathering powers.</p>
<p>The last time the commission conducted such an inquiry, into <a href="https://www.accc.gov.au/publications/residential-mortgage-price-inquiry-final-report">mortgage rates</a> in 2018, it gained access to nearly 40,000 documents from the big four banks and more than 7,000 from the smaller banks.</p>
<h2>Bad news for savers: when your rates began to fall</h2>
<p>What the commission is likely to find is that whereas transaction accounts stopped paying interest some time ago, so-called online accounts offering interest on large deposits were paying very reasonable interest – up until five years ago.</p>
<p>How do I know that’s the likely finding? Here’s what I found, when I graphed the Reserve Bank’s measure of the average online rate for a $10,000 deposit against the Reserve Bank’s cash rate, going back to 2010.</p>
<hr>
<p><iframe id="4oHRI" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/4oHRI/1/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>What the graph shows is that, until about five years ago, the online rate for big deposits moved in line with the cash rate and (as it happened) almost exactly matched it. When the cash rate was 3%, the online deposit rate was 3%, and so on.</p>
<p>But from 2018, the deposit rate fell away. Except for the time when both rates were close to zero during the early years of COVID, the rate paid on large deposits has stayed well below the cash rate ever since.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/511276/original/file-20230221-14-vdhjax.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/511276/original/file-20230221-14-vdhjax.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/511276/original/file-20230221-14-vdhjax.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=969&fit=crop&dpr=1 600w, https://images.theconversation.com/files/511276/original/file-20230221-14-vdhjax.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=969&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/511276/original/file-20230221-14-vdhjax.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=969&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/511276/original/file-20230221-14-vdhjax.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1218&fit=crop&dpr=1 754w, https://images.theconversation.com/files/511276/original/file-20230221-14-vdhjax.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1218&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/511276/original/file-20230221-14-vdhjax.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1218&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">Australian Banking Association chief Anna Bligh.</span>
<span class="attribution"><span class="source">Lukas Coch/AAP</span></span>
</figcaption>
</figure>
<p>That’s what the official figures say. But Anna Bligh, chief executive of the Australian Banking Association, sees them differently.</p>
<p>“This time last year, the four major banks, nobody, no bank was offering more than 0.3% on their savings account,” she told the <a href="https://www.afr.com/companies/financial-services/a-role-for-the-regulator-chalmers-warns-banks-to-lift-saving-rates-20230208-p5cirn">Australian Financial Review</a> this month. “Right now, they’re all offering at least 4% or more. So that’s a massive increase.”</p>
<p>But the rates Bligh quotes aren’t the standard ones. </p>
<p>The Commonwealth Bank is indeed paying 4% on its so-called NetBank Saver account, but the 4% is an introductory rate for new customers only – before slipping back to <a href="https://www.commbank.com.au/banking/netbank-saver.html">1.6%</a> after five months.</p>
<p>The web comparison site Canstar finds the average big bank introductory rate on $10,000 is <a href="https://images.theconversation.com/files/511271/original/file-20230221-28-xlcwh9.PNG">3.66%</a>, up from 0.24% before the Reserve Bank put up the cash rate by a total of 3.25 points.</p>
<p>But the average rate offered when the introductory bonus wears off has climbed by much less, from 0.05% to just <a href="https://images.theconversation.com/files/511271/original/file-20230221-28-xlcwh9.PNG">1.16%</a>.</p>
<h2>Complexity and suspected collusion makes switching hard</h2>
<p>And some of the high-looking rates have special conditions. </p>
<p>The Commonwealth’s GoalSaver account also offers 4%, but only if you put in more money in each month. If you can’t, or if you make a withdrawal, the rate plummets to <a href="https://www.commbank.com.au/banking/goal-saver.html">0.25%</a>.</p>
<p>The Australian Competition and Consumer Commission’s inquiry is likely to find that the complex nature of the deals makes switching hard, just as does the complex nature of electricity and health insurance deals.</p>
<p>That’s what it found about the bank’s <a href="https://www.accc.gov.au/publications/residential-mortgage-price-inquiry-final-report">mortgage offerings</a> in 2018.</p>
<p>It found the “opaque” nature of the offers inflated the costs of shopping around (including time and effort) and was one of the reasons why 70% of borrowers surveyed by one of the big banks said they signed up after getting just one quote.</p>
<p>It said the big four banks profited from the suppression of incentives to shop around and lacked strong incentives to make prices more transparent.</p>
<p>So why have the deposit rates offered by the big four banks dropped away?</p>
<p>When it came to mortgages, the ACCC suspected tacit collusion. Its 2018 report referred to a “synchronised” approach to rates seven times.</p>
<h2>Why the banks won’t act – unless we make them</h2>
<p>In very recent years, the banks have had less reason to offer high rates.
During the first 15 months of COVID, the Reserve Bank made available A$188 billion of funding to banks at the extraordinarily low rates of <a href="https://www.rba.gov.au/publications/bulletin/2021/sep/an-assessment-of-the-term-funding-facility.html">0.25% and 0.1%</a>.</p>
<p>This meant banks had less need to attract deposits, and in any event, they were overwhelmed with deposits. Elevated savings rates during COVID pushed an extra <a href="https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-finance-and-wealth/sep-2022/5232034.xlsx">$300 billion</a> through their doors, as worried and locked-down households sought out safe places to stash cash.</p>
<p>Both of these things are changing. The last of the Reserve Bank’s cheap three-year loans to banks expires mid-next year, and households are stashing less into banks than they used to.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-do-bankers-behave-badly-they-make-too-much-to-ask-questions-146685">Why do bankers behave badly? They make too much to ask questions</a>
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<p>It is possible deposit rates might be about to improve, all the more so because the banks will be under scrutiny until the ACCC inquiry reports at the end of the year.</p>
<p>When announcing the inquiry, the treasurer invoked fairness. Chalmers called on the banks to “pass on the interest rate rises to savers as quickly as you pass on the interest rate rises to mortgage holders”. </p>
<p>But fairness has little to do with it. The banks will pay depositors more only when they need to, or when they are pressured to. Until then, for many of us, deposits will earn next to nothing, regardless of where the Reserve Bank moves rates.</p>
<p>So if you’ve got a savings account, why not call up your bank, quote this article – and ask them what they’re going to do about it.</p><img src="https://counter.theconversation.com/content/200265/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>I graphed the average online rate for a $10,000 deposit against the Reserve Bank’s cash rate, going back to 2010. After seeing what that graph reveals, you’ll want to call your bank.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1967402023-01-05T14:59:28Z2023-01-05T14:59:28ZGlobal economy 2023: how countries around the world are tackling the cost of living crisis<figure><img src="https://images.theconversation.com/files/503205/original/file-20230105-22-p9kpo5.jpg?ixlib=rb-1.1.0&rect=59%2C22%2C4922%2C3458&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Many countries are dealing with a rapidly rising cost of living.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/rising-cost-living-inflation-financial-crisis-2172152013">Billion Photos/Shutterstock</a></span></figcaption></figure><p><em>The <a href="https://www.imf.org/en/Publications/WEO/Issues/2022/10/11/world-economic-outlook-october-2022">rising cost of living</a> is biting businesses and households around the world. Editors from across The Conversation’s international network have asked local academic experts to explain how their countries and regions are tackling this issue, as well as the 2023 outlook for prices and interest rates where they live.</em></p>
<p><em>This article is the third in our series on where the global economy is heading in 2023. It follows recent articles on <a href="https://theconversation.com/global-economy-2023-why-central-banks-face-an-epic-battle-against-inflation-amid-political-obstacles-197088">inflation</a> and <a href="https://theconversation.com/global-economy-2023-how-governments-could-make-the-energy-crisis-worse-this-year-196986">energy</a>.</em></p>
<h2>UK: recession on the horizon</h2>
<p><em>Alan Shipman, Senior Lecturer in Economics, The Open University</em></p>
<p>At first sight, the UK’s cost of living crisis might look fairly mild compared to other countries. Its inflation rate was 10.7% in November 2022, <a href="https://ec.europa.eu/eurostat/documents/2995521/15701156/2-16122022-AP-EN.pdf/4eaa941a-8c7d-af89-37da-f29f1167c24c">compared to</a> 12.6% in Italy, 16.% in Poland and over 20% in Hungary and Estonia. But the Bank of England expects a recession in the UK this year – possibly <a href="https://www.theguardian.com/business/2022/nov/03/bank-england-warn-uk-economy-longest-recession-100-year-raise-rate-three-percent">lasting until mid-2024</a>.</p>
<p>This is because the proportion of UK households that lack insulation against financial setbacks is unusually large for a wealthy economy. One pre-pandemic survey found that <a href="https://www.reuters.com/article/britain-homeless-housing-idUKL5N2692VV">3 million people in the UK would fall into poverty</a> if they missed one pay cheque, with the country’s high housing costs being a key source of vulnerability. Another recently suggested that <a href="https://www.citizensadvice.org.uk/about-us/about-us1/media/press-releases/a-third-of-uk-adults-just-20-away-from-falling-into-crisis-warns-citizens-advice/#:%7E:text=warns%20Citizens%20Advice-,A%20third%20of%20UK%20adults%20just%20%C2%A320%20away,into%20crisis%2C%20warns%20Citizens%20Advice&text=New%20analysis%20from%20Citizens%20Advice,head%20into%20the%20new%20year">one-third of UK adults would struggle</a> if their costs rose by just £20 a month.</p>
<p>The pandemic saw over 4 million households <a href="https://www.jrf.org.uk/report/dragged-down-debt-millions-low-income-households-pulled-under-arrears-while-living-costs-rise">take on extra debt</a> with almost as many falling behind on repaying it. And recent jumps in energy and food bills will push many over the edge, especially if heating costs remain high when the present <a href="https://www.instituteforgovernment.org.uk/explainers/energy-price-cap">government cap on energy prices</a> ends in April.</p>
<p>UK governments have been stealthily raising taxes since 2010 and in real terms (adjusting for inflation) typical UK household income was already <a href="https://www.resolutionfoundation.org/app/uploads/2022/07/Living-Standards-Audit-2022.pdf">2% lower in 2018 than in 2007</a>. But real incomes have been further eroded over the past year since the UK’s 10.7% inflation rate (as of November) is far above the pay increases many employees have had to settle for in recent months. </p>
<p>But recent events have forced the government to make decisions that were not necessarily aligned with the looming recession. In September 2022, Liz Truss became prime minister with bold <a href="https://www.telegraph.co.uk/business/2022/08/18/liz-truss-right-britain-has-productivity-crisis-why/">pledges to cure the UK’s economic malaise</a>. The global financial markets responded dramatically to her tax cutting plans by hiking the interest they charge the UK government and businesses to borrow. This forced the newly installed chancellor Jeremy Hunt to embark on another round of public spending cuts and <a href="https://ifs.org.uk/articles/are-we-new-era-austerity">tax increases</a> in November – actions governments usually reserve for the height of a boom, not the eve of a slump. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-bonds-work-and-why-everyone-is-talking-about-them-right-now-a-finance-expert-explains-191550">How bonds work and why everyone is talking about them right now: a finance expert explains</a>
</strong>
</em>
</p>
<hr>
<figure class="align-center ">
<img alt="A union jack, British flag, flies above the bank of england building in London." src="https://images.theconversation.com/files/503092/original/file-20230104-129706-1ae668.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/503092/original/file-20230104-129706-1ae668.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/503092/original/file-20230104-129706-1ae668.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/503092/original/file-20230104-129706-1ae668.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/503092/original/file-20230104-129706-1ae668.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/503092/original/file-20230104-129706-1ae668.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/503092/original/file-20230104-129706-1ae668.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Bank of England, London.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/bank-england-your-travel-concept-704695771">aslysun / Shutterstock</a></span>
</figcaption>
</figure>
<p>The Bank of England is also doing the opposite of what central banks prefer to do before a downturn. High inflation forced it to raise rates to <a href="https://www.bankofengland.co.uk/monetary-policy/the-interest-rate-bank-rate">3.5% in December</a>, with more rises expected in 2023. This boosts debt repayments for the millions who’ve borrowed to buy their homes, not to mention those with unsecured credit card or overdraft debt. </p>
<p>All of these additional costs subtract from a household’s disposable income. And because household consumption makes up <a href="https://commonslibrary.parliament.uk/research-briefings/sn02787/#:%7E:text=GDP%20by%20Expenditure,of%20the%20total%20in%202021">close to 60%</a> of all spending in the UK economy, this will inevitably lead to recession – which could well turn out to be very painful and very long.</p>
<h2>US: central bank signals caution</h2>
<p><em>John W. Diamond, Director of the Center for Public Finance at the Baker Institute, Rice University</em></p>
<p><a href="https://www.bls.gov/news.release/cpi.nr0.htm">Inflation increased significantly</a> in the US in late 2021 and early 2022, reaching levels higher than at any time in the last 40 years. The Federal Reserve responded by <a href="https://www.federalreserve.gov/monetarypolicy/openmarket.htm">aggressively raising its benchmark rate</a> (the federal funds rate) seven times since March in an effort to stabilise prices. A couple of <a href="https://www.forbes.com/sites/simonmoore/2022/12/15/fed-sees-further-hikes-in-2023-heres-what-could-change-that/?sh=67ad46c15a17">smaller increases</a> are expected in 2023. </p>
<p>The US consumer price index, a standard measure of inflation, <a href="https://fred.stlouisfed.org/series/CPIAUCSL#0">shows that prices peaked</a> in June 2022, increasing by 9.1% over the previous year. The index has decreased every month since June, with the November data – the most recent available – indicating that US prices are 7.1% over the prior 12 months.</p>
<p>The <a href="https://fred.stlouisfed.org/series/FEDFUNDS">fed funds rate</a> serves as a benchmark for other interest rates, such as mortgage rates. Its recent increases have started to reduce demand for goods and services and investment. For example, existing home sales in November were <a href="https://www.nar.realtor/research-and-statistics/housing-statistics/existing-home-sales">7.7% lower than in October</a> and are down over a third from a year earlier. The underlying reason is that mortgage interest rates <a href="https://fred.stlouisfed.org/series/MORTGAGE30US">have more than doubled to over 6%</a>, after reaching 7% in October, from 3% in the beginning of 2021. </p>
<p>The ripple effects of the reduction in housing demand will continue to slow economic activity for months to come because some of the impacts of monetary policy occur with a lag.</p>
<figure class="align-center ">
<img alt="A for sale sign outside a family house." src="https://images.theconversation.com/files/503095/original/file-20230104-129741-tpygfq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/503095/original/file-20230104-129741-tpygfq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/503095/original/file-20230104-129741-tpygfq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/503095/original/file-20230104-129741-tpygfq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/503095/original/file-20230104-129741-tpygfq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/503095/original/file-20230104-129741-tpygfq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/503095/original/file-20230104-129741-tpygfq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">US housing demand is falling.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/sale-sign-outside-family-house-1576779889">Juice Flair / Shutterstock</a></span>
</figcaption>
</figure>
<p>The Fed <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20221214a.htm">is now signalling</a> that it will continue to raise interest rates in early 2023 before pausing, a cautious approach that is justified by a variety of economic data. This is partly due to continued <a href="https://fred.stlouisfed.org/series/UNRATE">strength in the labour market</a> as unemployment remains low, wages that haven’t been adjusted for inflation <a href="https://www.bls.gov/ces/">continuing to rise</a>, and roughly 10 million jobs remaining open, according to the latest data. To the extent that companies have to raise wages to attract or keep workers, this may lead to higher prices and persistent inflation. </p>
<p>This issue is especially important given the <a href="https://acl.gov/sites/default/files/aging%20and%20Disability%20In%20America/2020Profileolderamericans.final_.pdf">ageing population</a> in the US and the effect it has on the labour market. At the same time, the recent <a href="https://www.theguardian.com/environment/2022/dec/29/european-gas-prices-fall-to-pre-ukraine-war-level">fall in energy prices</a> is unlikely to continue, so further reductions in inflation will have to come from declines in other areas, such as shelter and food. </p>
<h2>Australia and New Zealand: using restraint to ease inflation</h2>
<p><em>Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University</em></p>
<p>The regular survey of economic forecasts published by The Conversation Australia at the start of 2022 was <a href="https://theconversation.com/top-economists-expect-rba-to-hold-rates-low-in-2022-as-real-wages-fall-175054">titled</a>: Top economists expect RBA to hold rates low in 2022 as real wages fall.</p>
<p>This forecast for how the Reserve Bank of Australia would set rates in 2022 was spectacularly wrong. The second part turned out to be pretty right: <a href="https://www.theguardian.com/business/grogonomics/2022/dec/22/the-year-in-australian-economics-inflation-roars-interest-rates-bite-and-real-wages-fall-off-a-cliff#:%7E:text=real%20wages%20are%20falling">real wages did fall</a>, although not because they continued to barely grow as the experts had been expecting, but because their growth was dwarfed by an explosion in inflation.</p>
<p>After hovering below the Reserve Bank’s 2-3% target band for most of the previous five years, Australia’s annual rate of inflation began 2022 at 3.5% but shot up to 5.1% in March after Russia invaded Ukraine and reached 7.3% for the year to September. The bank expects <a href="https://www.rba.gov.au/publications/smp/2022/nov/economic-outlook.html#:%7E:text=Headline%20consumer%20price%20inflation%20is%20expected%20to%20peak%20around%208%C2%A0per%C2%A0cent%20at%20the%20end%20of%202022">something close to 8%</a> for the year to December when the figures are next updated in late January.</p>
<figure class="align-center ">
<img alt="A map of New Zealand and a red plane with a flag of New Zealand attached to its wings." src="https://images.theconversation.com/files/503107/original/file-20230104-70338-iu5lp2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/503107/original/file-20230104-70338-iu5lp2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=337&fit=crop&dpr=1 600w, https://images.theconversation.com/files/503107/original/file-20230104-70338-iu5lp2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=337&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/503107/original/file-20230104-70338-iu5lp2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=337&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/503107/original/file-20230104-70338-iu5lp2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/503107/original/file-20230104-70338-iu5lp2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/503107/original/file-20230104-70338-iu5lp2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&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"><a class="source" href="https://www.shutterstock.com/image-photo/map-new-zealand-red-plane-flag-1729818049">hyotographics / Shutterstock</a></span>
</figcaption>
</figure>
<p>Australia’s neighbour New Zealand has experienced much the same thing, with an <a href="https://www.stats.govt.nz/news/annual-inflation-at-7-2-percent/#:%7E:text=The%20consumers%20price%20index%20increased,in%20the%20March%202022%20quarter.">inflation rate that also hit 7.3%</a> and has since slipped to 7.2%. But its response has been dramatically different.</p>
<p>Whereas Australia’s Reserve Bank increased its rate in <a href="https://www.rba.gov.au/statistics/cash-rate/#:%7E:text=369%20entries%20found-,Interest%20Rate%20Decisions,-About%20the%20cash">eight small monthly steps from May</a>, either by 0.25 or 0.5 points, New Zealand’s Reserve Bank began pushing up rates much earlier and more aggressively – including <a href="https://www.rbnz.govt.nz/monetary-policy/monetary-policy-decisions">a recent 0.75 point hike</a>, even as it forecasts a New Zealand recession.</p>
<p>In Australia – unlike New Zealand, the US, the UK and much of the rest of the developed world – a recession isn’t commonly forecast, largely because of the bank’s restraint in the face of a three-decade inflation high. This approach has served Australia well over the 29 years until the COVID recession in 2020. The country avoided the “Great Recession” after the 2007-08 global financial crisis and the 2001 “tech wreck” recession that hit the US and much of the rest of the world in 2001.</p>
<p>This restraint also reflects a belief among authorities that <a href="https://www.afr.com/policy/economy/wage-spiral-like-1970s-not-likely-again-rba-20220915-p5bic1">a wage-price spiral isn’t taking hold in Australia</a>. Wage growth remains mired at 3.1%, well below New Zealand’s 7.4%. </p>
<p>And inflationary pressure seems to be easing. Global oil and wheat prices are down one-quarter to one-third from mid-2022 peaks following Russia’s Ukraine invasion. The Reserve Bank reckons Australian inflation will slide throughout 2023, slipping to 4.7% by the end of 2023, and to 3.2% by the end of 2024, almost back to its 2-3% target band.</p>
<p>By being less hawkish than its global counterparts, the bank hopes to remain on the right side of history.</p>
<h2>France: managing price increases relatively well (for now)</h2>
<p><em>Aymen Smondel, Maître de conférences en finance and Mohamad Hassan Shahrour, Maître de Conférences en Finance, Université Côte d'Azur, IAE Nice - Université Côte d'Azur</em></p>
<p>Inflation is an area where France appears to be more resilient than its neighbours. In December 2022, the country’s inflation rate (measured by the consumer price index) was 6.1%, compared with <a href="https://data.oecd.org/fr/price/inflation-ipc.htm">10% in Germany, 11.8% in Italy and 9.3% in the UK</a>.</p>
<p>The main challenge facing countries, and contributing to inflation – or even <a href="https://theconversation.com/1970s-style-stagflation-now-playing-on-central-bankers-minds-185868">stagflation</a> (which refers to a combination of inflation and low economic growth) in the case of some economies – is the huge increase in energy prices in recent years.</p>
<p>Faced with this rise, the total French state budget devoted to mitigating household energy bills is set to reach at least <a href="https://www.lemonde.fr/energies/article/2022/09/14/crise-energetique-l-executif-debloque-45-milliards-d-euros-pour-prolonger-le-bouclier-tarifaire_6141645_1653054.html">€75 billion</a> (£66 billion) across 2022 to 2023, through schemes including <a href="https://www.service-public.fr/particuliers/actualites/A15480?lang=en">energy vouchers and a tariff shield</a>.</p>
<p>These actions have kept the inflation rate well below that of most European economies. In addition, France is less reliant on fossil fuel products, and therefore less vulnerable to energy price fluctuations. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/503026/original/file-20230104-22-tnm2gc.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Line graph showing that France's use of nuclear for electricity production is significantly higher than that of the UK and Germany." src="https://images.theconversation.com/files/503026/original/file-20230104-22-tnm2gc.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/503026/original/file-20230104-22-tnm2gc.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=502&fit=crop&dpr=1 600w, https://images.theconversation.com/files/503026/original/file-20230104-22-tnm2gc.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=502&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/503026/original/file-20230104-22-tnm2gc.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=502&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/503026/original/file-20230104-22-tnm2gc.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=630&fit=crop&dpr=1 754w, https://images.theconversation.com/files/503026/original/file-20230104-22-tnm2gc.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=630&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/503026/original/file-20230104-22-tnm2gc.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=630&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://ourworldindata.org/electricity-mix">Our World in Data</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>While the chart above shows France’s use of domestic nuclear power sources, the chart below shows that other countries rely more on – often imported – fossil fuels. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/503057/original/file-20230104-22-3dekit.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Line chart showing that the UK, Germany and Italy rely much more on fossil fuels for power generation." src="https://images.theconversation.com/files/503057/original/file-20230104-22-3dekit.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/503057/original/file-20230104-22-3dekit.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=502&fit=crop&dpr=1 600w, https://images.theconversation.com/files/503057/original/file-20230104-22-3dekit.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=502&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/503057/original/file-20230104-22-3dekit.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=502&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/503057/original/file-20230104-22-3dekit.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=630&fit=crop&dpr=1 754w, https://images.theconversation.com/files/503057/original/file-20230104-22-3dekit.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=630&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/503057/original/file-20230104-22-3dekit.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=630&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://ourworldindata.org/electricity-mix">Our World in Data</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Energy issues aside, countries are also <a href="https://link.springer.com/article/10.1023/A:1009782809329">impacted by the global market</a> just like companies are affected by their <a href="https://journals.openedition.org/fcs/8844">institutional environment</a>. As a result, future changes in public policy could influence the inflation rate, which may or may not have peaked.</p>
<p>For example, the <a href="https://theconversation.com/us/topics/european-central-bank-ecb-128260">European Central Bank’s decision</a> to raise interest rates for the first time in a decade last July could weigh on countries’ budgets, giving governments less room for manoeuvre as they try to contain price increases.</p>
<p>Without some regional stability in terms of politics and economics, France may not be able to continue to outperform its neighbours in the coming months.</p>
<p><em>This is an edited excerpt from <a href="https://theconversation.com/inflation-why-france-is-holding-up-better-than-its-neighbours-for-now-192214">an article published in October 2022</a>.</em></p>
<h2>Spain: inflation, public spending, deficit and debt</h2>
<p><em>Luis Garvía Vega, Director del Máster Universitario en Gestión de Riesgos Financieros (MUGRF) en ICADE Business School, Universidad Pontificia Comillas</em></p>
<p>After beginning 2022 with <a href="https://www.ine.es/daco/daco42/daco421/ipcia1122.pdf">inflation at 6.1%</a>, Spain’s consumer price index peaked at 10.8% in July before closing out the year at a rate of 6.8%. Taking into account the 2021 inflation journey from 0.5% in January, to 2.9% in July and 6.5% in December, it now looks like price rises are being brought under control.</p>
<p>Core inflation (which excludes unprocessed food and energy) saw a more gradual but sustained rise. It was 2.4% in January 2022, peaked at 6.4% in August and fell to 6.3% in November. The closing gap with headline inflation during the final quarter of last year was mainly due to government measures to <a href="https://www.eldiario.es/economia/medidas-gobierno-energia-espana-sea-pais-zona-euro-crecen-precios_1_9758302.html">control the rise in energy prices</a>.</p>
<p><strong>Inflation in Spain, 2021-2022</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/502884/original/file-20230103-12-i5hc53.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/502884/original/file-20230103-12-i5hc53.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/502884/original/file-20230103-12-i5hc53.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=261&fit=crop&dpr=1 600w, https://images.theconversation.com/files/502884/original/file-20230103-12-i5hc53.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=261&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/502884/original/file-20230103-12-i5hc53.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=261&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/502884/original/file-20230103-12-i5hc53.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=329&fit=crop&dpr=1 754w, https://images.theconversation.com/files/502884/original/file-20230103-12-i5hc53.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=329&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/502884/original/file-20230103-12-i5hc53.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=329&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Spain’s Consumer Price Index (the figure for November 2022 refers to the leading indicator).</span>
<span class="attribution"><a class="source" href="https://www.ine.es/dyngs/INEbase/en/operacion.htm?c=Estadistica_C&cid=1254736176802&menu=ultiDatos&idp=1254735976607">National Statistics Institute (INE), Spain</a></span>
</figcaption>
</figure>
<p>Like many other countries, <a href="https://datosmacro.expansion.com/estado/gasto/espana#:%7E:text=El%20gasto%20p%20C3%BAblico%20en%20Espa%20Espa%C3%B1a,51%2C9%25%20del%20GDP.">Spain lacks control and efficiency</a> when it comes to public spending. The country’s <a href="https://theconversation.com/retos-y-costes-de-la-reforma-de-las-pensiones-en-espana-174042">pension system</a> must support a rapidly growing older population; it is highly dependent on fossil fuels; the <a href="https://www.bankinter.com/blog/economia/previsiones-paro-espana#:%7E:text=Previsi%C3%B3n%20paro%20Espa%C3%B1a%20en%202023%20y%202024&text=La%20Tasa%20de%20Paro%20se,la%20creaci%C3%B3n%20de%20empleo%20neto.">unemployment rate has been above 10%</a> since 2008; and – again like other countries – it is suffering from deep political and social polarisation right now. A <a href="https://www.bankinter.com/blog/economia/prevision-deficit-publico-espana">high public deficit</a> has also helped inflate the <a href="https://www.bde.es/f/webbde/GAP/Secciones/SalaPrensa/NotasInformativas/22/presbe2022_106.pdf">Spanish debt bubble</a>. </p>
<figure class="align-center ">
<img alt="Aerial view of Cibeles fountain at Plaza de Cibeles in Madrid in a beautiful summer day, Spain" src="https://images.theconversation.com/files/503091/original/file-20230104-22-xj2qsx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/503091/original/file-20230104-22-xj2qsx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/503091/original/file-20230104-22-xj2qsx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/503091/original/file-20230104-22-xj2qsx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/503091/original/file-20230104-22-xj2qsx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/503091/original/file-20230104-22-xj2qsx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/503091/original/file-20230104-22-xj2qsx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Spain’s unemployment rate has been above 10% since 2008.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/aerial-view-cibeles-fountain-plaza-de-262331123">Sergii Figurnyi / Shutterstock</a></span>
</figcaption>
</figure>
<p>But this is an election year for municipal, regional and general government and so major reforms will be difficult – particularly anything that affects Spain’s 9 million pensioners or its more than 3 million public workers.</p>
<p>Digitalisation and training could provide a solution by supporting more efficient management of resources. This could help to gauge available resources and develop ways to find savings while also addressing the needs of Spain’s people. It makes no sense that even though productivity is now higher thanks to technology, social inequality prevails. </p>
<p>Hopefully 2023 will see more discussion of digital identity and currencies or even universal income, and less of the words that characterised 2022: crisis, war and inflation.</p>
<h2>Indonesia: seven-year inflation high leads to massive layoffs</h2>
<p><em>Bhima Yudhistira Adhinegara, Direktur, Center of Economic and Law Studies (CELIOS)</em></p>
<p>While relatively low compared to other countries, Indonesia’s overall inflation rose to <a href="https://jakartaglobe.id/business/indonesia-inflation-jumps-to-the-highest-level-in-seven-years">its highest level in seven years</a>, reaching nearly 6% in September 2022. Ballooning food and subsidised fuel prices are behind this increase. </p>
<p>At the beginning of this year, Indonesia, the world’s biggest crude palm oil producer <a href="https://www.economist.com/asia/2022/04/02/indonesia-the-worlds-biggest-producer-has-a-palm-oil-crisis">struggled to control cooking oil prices</a> due to a supply bottleneck, despite enjoying <a href="https://www.thejakartapost.com/business/2022/07/24/experts-warn-of-overreliance-on-coal-cpo-in-exports.html">the financial benefits</a> of the commodity’s price increase.</p>
<figure class="align-center ">
<img alt="Banjarmasin, September 2012. A trader from lok baintan offer guava fruit in the Floating Culture Festival in Banjarmasin." src="https://images.theconversation.com/files/503210/original/file-20230105-12-nw1pdg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/503210/original/file-20230105-12-nw1pdg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=398&fit=crop&dpr=1 600w, https://images.theconversation.com/files/503210/original/file-20230105-12-nw1pdg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=398&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/503210/original/file-20230105-12-nw1pdg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=398&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/503210/original/file-20230105-12-nw1pdg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/503210/original/file-20230105-12-nw1pdg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/503210/original/file-20230105-12-nw1pdg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Rising prices for food and other commodities have impacted Indonesia’s economy.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/banjarmasin-september-2012-trader-lok-baintan-291274601">Robby Fakhriannur/Shutterstock</a></span>
</figcaption>
</figure>
<p>More generally, the <a href="https://en.tempo.co/read/1668719/mid-december-food-prices-rice-beef-and-onions-still-rising">prices of staple commodities</a> – from rice to spices – also rose on the back of failed harvests due to unpredictable weather. In addition, the ongoing war between Russia and Ukraine partially <a href="https://kumparan.com/kumparanbisnis/peternak-ayam-klaim-harga-telur-di-konsumen-saat-ini-sudah-normal-ini-alasannya-1ykUkJmRTg2">contributed to rising food prices</a>, especially food for animals, which became more expensive and affected livestock prices. The government’s decision to <a href="https://www.reuters.com/world/asia-pacific/indonesia-bites-bullet-fuel-prices-subsidies-soar-2022-09-03/">raise subsidised fuel prices by 30%</a> in September delivered a further blow to the country’s inflation rate.</p>
<p>This inflation has increased the cost of living as it has not been accompanied by a sufficient wage increases. In 2022, Indonesia’s minimum wage increased only by 1.09% – <a href="https://bisnis.tempo.co/read/1529672/pakar-ugm-sebut-rata-rata-kenaikan-ump-109-persen-terendah-sepanjang-sejarah">the lowest-ever recorded rate</a>. With annual inflation hitting 5.51%, it means that the purchasing power for those on lower incomes has declined by 4.42%. </p>
<p>Job opportunities are even more limited amid high inflation rates. Export-oriented manufacturing companies have begun to carry out <a href="https://www.cnnindonesia.com/ekonomi/20221214170325-92-887409/kemnaker-industri-manufaktur-dan-startup-paling-rentan-phk-di-2023">mass layoffs</a>. Digital startups, the hope of young people during the pandemic, have also <a href="https://jakartaglobe.id/tech/jdid-layoffs-reflect-struggles-in-indonesian-startup-industry">cut employee numbers</a>. At the same time, <a href="https://www.bps.go.id/pressrelease/2022/11/07/1916/agustus-2022--tingkat-pengangguran-terbuka--tpt--sebesar-5-86-persen-dan-rata-rata-upah-buruh-sebesar-3-07-juta-rupiah-per-bulan.html">four million new workers</a> joined the labour market between August 2021 and 2022, while Indonesia already has a <a href="https://www.macrotrends.net/countries/IDN/indonesia/youth-unemployment-rate">youth unemployment rate of 16%</a> – relatively high for southeast Asia.</p>
<p>Meanwhile, to curb inflation, the central bank <a href="https://www.cnbcindonesia.com/market/20221226071747-17-399979/dunia-putar-arah-suku-bunga-acuan-bi-loncat-jadi-55">raised interest rates by 2%</a> between July and December 2022, triggering an increase in lending rates. <a href="https://databoks.katadata.co.id/datapublish/2022/05/23/kpr-masih-jadi-pilihan-favorit-masyarakat-membeli-rumah-pada-triwulan-i-2022">More than 70% of house purchases</a> in Indonesia rely on mortgages and it might also now be more difficult for new businesses to access much-needed loans.</p>
<p>While state revenues from commodities are increasing due to the recent bonanza, inflation in 2023 is <a href="https://www.euromonitor.com/article/inflation-and-election-uncertainty-will-weigh-on-indonesian-consumers-in-2023">expected to remain high</a>, mostly due to elevated transport costs driven by volatile fuel prices. The Indonesian government now needs to rethink inflation policy and public service costs such as healthcare insurance fees and public transportation rates. These items affect most people and will trigger an additional inflationary impact.</p>
<h2>Canada: changing plans for parenthood and dating highlight cost concerns</h2>
<p><em>Wayne Simpson, Professor, Department of Economics, University of Manitoba</em></p>
<p>Like almost every other country in the world, there’s been no shortage of economic uncertainty in Canada over the past year. Russia’s invasion of Ukraine disrupted global fuel supplies, causing gas prices to reach record levels. The Bank of Canada’s aggressive interest rate hikes also caused recession jitters. Inflation and the cost of living remain big concerns for Canadians in 2023.</p>
<p>Canadians spent <a href="https://www.bnnbloomberg.ca/81-of-canadians-are-worried-about-a-recession-in-2023-survey-1.1862967">less on travel over the holiday season</a> because of these fears. And even though lower gas prices provided some relief over the same period, the price at the pumps still soared to record heights in 2022. Some experts predict they will <a href="https://www.cbc.ca/news/canada/calgary/bakx-oil-gas-fuel-evs-solar-wind-renewables-1.6693940">rise again in 2023</a>.</p>
<p>The price of groceries has also been <a href="https://abacusdata.ca/food-costs-canada-inflation/">a serious pain point</a> for Canadians, and <a href="https://www.dal.ca/sites/agri-food/research/canada-s-food-price-report-2023.html">grocery costs could soar</a> by up to 7% more in 2023. Rising food costs are in part a result of Ukraine-related disruptions in three major commodities: wheat, sunflower oil and especially fertilisers, which drove Canadian crop production costs up by 6-8% in 2022. Concerns have already been expressed about <a href="https://www.cbc.ca/news/health/food-prices-canada-health-impacts-1.6641322">the impact of rapidly rising food prices on Canadians’ health</a>, especially families with low incomes. </p>
<p>The silver lining to the economic volatility has been housing prices in Canada. Experts predict a continuing cooling trend in some of the hottest – and most unaffordable – housing markets in the country. One report forecasts <a href="https://www.bnnbloomberg.ca/td-sees-up-to-25-drop-in-canadian-home-prices-by-early-2023-1.1811945">the average price of a Canadian home could drop by 25%</a> in the first quarter 2023. Prohibitively high mortgage rates, low inventory and uncertainty about where the Bank of Canada’s interest rate cycle will finally peak could explain the slowdown.</p>
<p>Some reports suggest Canada’s higher cost of living <a href="https://financialpost.com/moneywise-pro/why-the-cost-of-living-has-some-canadians-delaying-parenthood-and-tips-for-how-to-afford-it">is even causing people to postpone parenthood</a>. And certain <a href="https://www.cbc.ca/news/business/inflation-dating-canada-1.6686287">dating apps report</a> that users are keeping dates simple and economical by suggesting casual activities rather than “fancy”, expensive or elaborate nights out.</p>
<p>The fact that prices in other G7 countries such as the US, UK, Germany and Italy <a href="https://www.ctvnews.ca/business/interest-rates-vs-inflation-rates-how-the-g7-countries-compare-to-canada-1.6139811">increased at an even faster rate than Canada in 2022</a> may be a small consolation to Canadian consumers. More sobering are <a href="https://thoughtleadership.rbc.com/past-the-peak/#:%7E:text=But%20fully%20returning%20inflation%20to,the%20end%20of%20next%20year.">forecasts of further inflation in 2023</a> before annual inflation settles back into the more familiar and comfortable range of 1-3% in 2024. </p>
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<p><em>This article is part of <a href="https://theconversation.com/topics/global-economy-2023-132115">Global Economy 2023</a>, our series about the challenges facing the world in the year ahead. You might also like our Global Economy Newsletter, which you can <a href="https://theconversation.com/uk/newsletters/global-economy-and-business-115?utm_source=Global+Economy&utm_medium=linkback&utm_campaign=2023">subscribe to here</a>.</em></p><img src="https://counter.theconversation.com/content/196740/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Price inflation has hit countries differently, but most central banks and governments are concerned about the rising cost of living in 2023.Alan Shipman, Senior Lecturer in Economics, The Open UniversityAymen Smondel, Maître de conférences en finance, IAE de Nice, Université Côte d’AzurBhima Yudhistira Adhinegara, Direktur, Center of Economic and Law Studies (CELIOS)John W. Diamond, Director of the Center for Public Finance at the Baker Institute, Rice UniversityLuis Garvía Vega, Director del Máster Universitario en Gestión de Riesgos Financieros (MUGRF) en ICADE Business School, Universidad Pontificia ComillasMohamad Hassan Shahrour, Maître de Conférences en Finance, Université Côte d'Azur, IAE Nice - Université Côte d'AzurPeter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityWayne Simpson, Professor, Department of Economics, University of ManitobaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1882812022-08-05T03:29:27Z2022-08-05T03:29:27ZVIDEO: Government’s climate win, Plibersek says no to coal mine, Albanese moves forward on referendum<p>University of Canberra Professorial Fellow Michelle Grattan and University of Canberra Associate Professor Caroline Fisher discuss the week in politics.</p>
<p>Michelle and Caroline discuss the first fortnight sitting of the new parliament, with the government’s emissions reduction bill passing on the final day, leaving the opposition looking divided and with the big challenge of forging a credible climate policy for the next election. </p>
<p>This week also saw Environment Minister Tanya Plibersek indicate she will block the development of a new coal mine, backed by Clive Palmer, that she says would have had an adverse impact on the Great Barrier Reef. </p>
<p>Michelle and Caroline also canvass the prospects and difficulties for the referendum on the Indigenous Voice to Parliament, after Anthony Albanese released the draft wording at the weekend.</p>
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<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>University of Canberra Professorial Fellow Michelle Grattan and Assistant Professor Caroline Fisher discuss the week in politicsMichelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1880762022-08-02T07:43:17Z2022-08-02T07:43:17ZWord from The Hill: Peter Dutton puts nuclear power on opposition’s agenda<figure><img src="https://images.theconversation.com/files/477113/original/file-20220802-15-bjhnv8.png?ixlib=rb-1.1.0&rect=0%2C11%2C4000%2C1976&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption"></span> </figcaption></figure><p>As well as her interviews with politicians and experts, Politics with Michelle Grattan includes “Word from The Hill”, where she discusses the news with members of The Conversation politics team.</p>
<p>In this podcast, politics editor Amanda Dunn and Michelle canvass Tuesday’s decision by the Reserve Bank to raise the cash rate again, by 50 basis points to 1.85%. </p>
<p>They also talk about Peter Dutton’s announcement that the opposition will inquire into nuclear power, in a contentious decision as it looks to crafting an energy policy for the next election. Most immediately, the Coalition will vote against the government’s legislation for its 43% 2030 emissions reduction target. The vote in the House of Representatives will be this week. </p>
<p>Meanwhile, after Anthony Albanese’s weekend Garma speech, attention this week also turned to the proposed referendum to put into the constitution an Indigenous “Voice” to parliament.</p><img src="https://counter.theconversation.com/content/188076/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>Michelle Grattan discusses politics with politics + society editor, Amanda DunnMichelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1871862022-07-18T13:16:44Z2022-07-18T13:16:44ZView from The Hill: Chalmers warns he’ll deliver bad news<p>The first week of the new parliament will contain some depressing news, with Treasurer Jim Chalmers on Monday softening up the community to expect a “confronting” statement on the economy. </p>
<p>Chalmers said he would deliver his statement on Thursday July 28. It will contain updated forecasts, and bad news on real wages. </p>
<p>While argy bargy over the government’s climate legislation will provide much of the colour and movement of the first parliamentary fortnight, commencing July 26, the Chalmers statement will go to the nitty gritty of how difficult the economic outlook – and therefore many people’s financial juggling – will be over the months ahead. </p>
<p>A day before the statement, the inflation figures for the June quarter will be released, revealing a further spike. The most recent inflation number, for the March quarter, was 5.1%.</p>
<p>The Reserve Bank Governor Philip Lowe and The Conversation’s poll of economic forecasters predict <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">7%</a> by year’s end. </p>
<p>On Monday New Zealanders learnt that their inflation rate had climbed to <a href="https://www.stats.govt.nz/indicators/consumers-price-index-cpi/">7.3%</a></p>
<p>The Reserve Bank is also expected to raise interest rates again the week after Chalmers’ statement. </p>
<p>Chalmers told a Monday news conference: “When it comes to our expectations of inflation, when it comes to the impact of interest rate rises on growth, when it comes to what this spike in inflation means for real wages, there will be aspects of this ministerial statement that people will find confronting”. </p>
<p>Pressed on real wages, he said: “It will be confronting in terms of real wages because there is no credible economic forecaster in Australia right now who thinks that wages growth is going to keep up with inflation. </p>
<p>"And we will be revising up our expectations for inflation. And so that will make the real wages situation worse before it gets better.”</p>
<p>He said rising interest rates would have an impact on growth “and I’ll talk about that in the update”.</p>
<p>“I will be providing a suite of economic forecasts and an indication of what that means for the budget position as well. My inclination is to be as broad as I can and as full as I can when it comes to the update.” But he said it would not announce new policy.</p>
<p>As the government searches for savings to make in the October budget, Chalmers stressed the increasing burden rising interest rates would have on servicing government debt. </p>
<p>“Every additional dollar in the budget is a borrowed dollar and that now costs us more to pay back because of rising interest rates. </p>
<p>"And if you think about the consequences of those rising interest rates on the Budget - more than a billion dollars this year, more than $5 billion in the last year of the forwards, $13 billion accumulated over the forwards, $18 billion in 2032-33. So these are not small amounts of money.”</p>
<p>The government added to the budget burden at the weekend when it decided to reinstate the COVID pandemic leave payment for workers forced to isolate without sick leave. This measure, running to the end of September, will cost an estimated total of about $780 million, although the states have agreed to pay half. </p>
<p>Chalmers said that in speeches this week he would be talking about supply side issues. “We need to recognise that the reason we’ve got high and rising inflation is not just a story about too much demand in the economy – it’s also a story about choked-off supply. </p>
<p>"And that’s why almost every element of our economic plan is about making our supply chains more resilient. </p>
<p>"Making sure that we can get the workers that we need, making sure we can get the goods to market, making sure that we can lift the speed limit on the economy.”</p>
<p>Chalmers said the world economy was “a difficult, if not dangerous place right now. That combination of inflation and rising interest rates and slowing growth and food and energy insecurity, combined with the amount of debt that countries have racked up is a cause for concern in the global community”.</p>
<p>Also on the economic front, Chalmers is set to announce imminently the panel and terms of reference for a far-reaching inquiry into the Reserve Bank. </p>
<p>The Treasurer said he would consult the shadow treasurer Angus Taylor on the inquiry’s terms of reference, but said he expected him to have no problem with them. They would be broad enough to encompass any concerns anyone could reasonably have about conduct of the bank and the arrangements governing the bank.</p>
<p>Of interest in Thursday week’s economic statement will be the Treasury’s forecasts on the unemployment rate, which, at 3.5%, has already fallen below the forecast in the Coalition’s March budget of 3.75%, and the forecast for inflation, which in the March budget was forecast to hit only 4.25% in the year to June 2022.</p>
<p>The latest monthly update from the Finance Department, for May, shows the budget deficit far smaller than forecast in March, showing a deficit for the 2021-22 financial year to May 2022 of $33.4 billion against the budget profile deficit of $60.5 billion.</p><img src="https://counter.theconversation.com/content/187186/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 first week of the new parliament will contain some depressing news, with Treasurer Jim Chalmers on Monday softening up the community to expect a “confronting” statement on the economy.Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1863872022-07-05T07:16:05Z2022-07-05T07:16:05ZWord from The Hill: People’s pockets hit again, with rate rise and floods set to boost veggie prices<figure><img src="https://images.theconversation.com/files/472441/original/file-20220705-16-55xkmw.png?ixlib=rb-1.1.0&rect=5%2C17%2C3988%2C1976&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption"></span> </figcaption></figure><p>As well as her interviews with politicians and experts, Politics with Michelle Grattan includes “Word from The Hill”, where she discusses the news with members of The Conversation politics team.</p>
<p>Michelle and Peter Browne from the Politics + Society team discuss Anthony Albanese’s visit to Ukraine, and the desirability of Australia reopening its embassy there as soon as it can. More generally, Australia’s diplomatic presence has slipped and needs to be beefed up. </p>
<p>With the PM now home, he’s off to the flood affected areas of NSW. Labor has learned from the former government’s experience, and has acted quickly to get in resources, seeking to avoid the criticism Scott Morrison faced in the earlier floods. </p>
<p>Meanwhile the Reserve Bank has again increased interest rates, with the cash rate rising by half a percentage point. Also hitting people’s pockets – the latest floods will have some impact on fresh food prices.</p><img src="https://counter.theconversation.com/content/186387/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>Michelle Grattan discusses politics with Peter Browne from the politics + society teamMichelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1855062022-06-21T07:55:47Z2022-06-21T07:55:47ZWord from The Hill: On interest rates, people smugglers, parliamentary sitting, and Julian Assange<figure><img src="https://images.theconversation.com/files/469973/original/file-20220621-13-glb7u.png?ixlib=rb-1.1.0&rect=11%2C11%2C3982%2C1982&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption"></span> </figcaption></figure><p>As well as her interviews with politicians and experts, Politics with Michelle Grattan includes “Word from The Hill”, where she discusses the news with members of The Conversation politics team.</p>
<p>Politics editor Amanda Dunn and Michelle discuss Reserve Bank Governor Philip Lowe’s Tuesday statements about the economic outlook. Lowe has again warned of more rate rises, indicating the bank is determined to reduce inflation from a likely 7% at year’s end down to the 2-3% target range. But the Governor says he doesn’t expect Australia to face a recession. </p>
<p>Meanwhile Home Affairs Minister Clare O'Neil has visited Sri Lanka this week amid concerns the people smugglers are looking to test Australia’s borders now there’s a new government. Australia, which needs Sri Lanka to be as active as possible in stopping boats leaving, has announced $50 million in aid for that country, directed to its food and health needs. </p>
<p>With Wikileaks founder Julian Assange facing extradition from Britain to the United States, Anthony Albanese is under pressure to make strong representations to have the Australian freed. Albanese is sympathetic, but whether he can achieve any progress is another matter. </p>
<p>The calendar for the new parliament has now been released, showing only four sitting weeks between now and the October budget.</p><img src="https://counter.theconversation.com/content/185506/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>Michelle Grattan discusses politics with politics + society editor, Amanda DunnMichelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1851192022-06-15T01:38:18Z2022-06-15T01:38:18ZFair Work Commission gives a 5.2% – $40 a week – increase in the minimum wage<p>The Fair Work Commission has announced a rise in the minimum wage of 5.2% or $40 a week, taking it to $812.60 a week or <a href="https://www.fwc.gov.au/hearings-decisions/major-cases/annual-wage-reviews/annual-wage-review-2021-22/decisions-statements">$21.38 an hour</a>. </p>
<p>The rise will take effect on July 1. </p>
<p>The increase is slightly above the increase the government had publicly supported for the minimum wage, which was 5.1%, the rate of inflation.</p>
<p>But award minimum wages will be increased by less – 4.6%, with a minimum rise of $40 a week. This means workers on award minimum wages above $869.60 per week will get a 4.6% rise, while those earning less will receive a $40 increase. The 4.6% will cut in at trade level. </p>
<p>Only the lowest paid 2% of workers are on the national minimum wage, while a further 23% receive the minimum award rates. </p>
<p>For workers generally the award increases will also take effect on July 1, except for those in aviation, hospitality, and tourism where the increases will take effect on October 1 because of what the commission describes as “exceptional circumstances” in these industries. </p>
<p>The 5.2% rise is above the latest inflation number of 5.1%. But workers face further substantial rises in inflation in coming months. </p>
<p>Reserve Bank Governor Philip Lowe said on Tuesday inflation is likely to increase to 7% by the end of the year. </p>
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<p>Employers argued for smaller increases, and the Master Grocers Association and Restaurant & Catering Australia argued for no increase, while the ACTU wanted a 5.5% increase. </p>
<p>The Albanese government said in its submission low income workers should not go backwards. In the election campaign, Albanese said he would “absolutely” support an increase for the lowest-paid to match the 5.1% inflation rate.</p>
<p>The commission said the most significant changes since last year’s decision had been the sharp increase in the cost of living and the labour market’s strengthening. “The sharp rise in inflation impacts business and workers,” it said.</p>
<p>“The low paid are particularly vulnerable in the context of rising inflation.”</p>
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<p>“The panel accepted the need for moderation in order to contain the inflationary pressures arising from our decision,” the commission said. </p>
<p>It acknowledged the increases would mean a real wage cut for some workers on awards and some, though minor, compression of relativities.</p>
<p>“The panel concluded that given the current strength of the labour market the increases it has decided to make will not have a significant adverse effect on ‘the performance and competitiveness of the national economy’”. </p>
<p>The Commission is required by the Fair Work Act to take into account “the performance and competitiveness of the national economy, including productivity, business competitiveness and viability, inflation and employment growth”.</p>
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Read more:
<a href="https://theconversation.com/lifting-the-minimum-wage-isnt-reckless-its-what-low-earners-need-183643">Lifting the minimum wage isn't reckless – it's what low earners need</a>
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<p>Reserve Bank Governor Lowe told the ABC that the 7% expected inflation was “a very high number and we need to be able to chart a course back to 2-3% inflation”. </p>
<p>On interest rates, Lowe said it would be “reasonable” for the cash rate to reach 2.5%. But how fast that was reached or indeed, if it were reached, would be “determined by events”. </p>
<p>He said inflation would peak in the December quarter and start to come off “by the first quarter next year”. </p>
<p>“By the time we get into the second half of next year, inflation will clearly be coming down. But in the first quarter, we’ll see lower rates of headline inflation.”</p>
<p>The ACTU welcomed the wage decision but said a better system was needed to deliver wage growth more generally. ACTU Secretary Sally McManus said: “This Annual Wage Review is one tool we have to generate wage growth, but it only affects one in four workers – we need wage growth across the economy.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1536872169950482434"}"></div></p>
<p>"Clearly the current system is failing. It is unable to deliver wage increases despite low unemployment, high productivity and high profits. Working people are feeling the serious consequences of nearly 10 years of inaction by the previous government.</p>
<p>"Our country needs to take a fresh look at this problem and address it. It is not acceptable that working Australians and their families continue to go backwards while big business does so well.”</p>
<p>But the Australian Chamber of Commerce and Industry, which argued for a 3% increase, said the rises were too large.</p>
<p>It said the decisions on the minimum and award wages “will hit those industries which have been hurt the most by COVID-19 restrictions and will cost Australian businesses $7.9 billion a year. </p>
<p>"Coupled with the 0.5% increase in the superannuation guarantee from July 1, this is a significant impost for small business.”</p>
<p>ACCI chief executive Andrew McKellar said: “While some businesses have rebounded strongly in recent months, the reality is we are experiencing a multi-speed economy. Many award reliant business were severely disrupted by the COVID-19 pandemic and are only just beginning to recover. Imposing unaffordable wage increases on these small businesses will put jobs at risk, not create them.”</p><img src="https://counter.theconversation.com/content/185119/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 Fair Work Commission has announced a rise in the minimum wage of 5.2% or $40 a week, taking it to $812.60 a week or $21.38 an hourMichelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1848432022-06-10T03:51:51Z2022-06-10T03:51:51ZVIDEO: Coalition should be circumspect on nuclear talk before thinking through whether it really wants to go there<p>University of Canberra Professorial Fellow Michelle Grattan and Emma Larouche, from the University of Canberra’s Media and Communications team, look at the first week of an Albanese government.</p>
<p>They discuss the latest interest rate hike, the energy crisis that’s part of the escalating cost of living, and the nuclear talk coming from Coalition figures. It’s been a hard week for the government – but one bright spot was Anthony Albanese’s trip to Indonesia.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/9bzPfwru_-E?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
</figure><img src="https://counter.theconversation.com/content/184843/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>Michelle Grattan discusses the political week that was with Emma La Rouche from the University of Canberra’s Media and Communications teamMichelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1845532022-06-07T07:10:41Z2022-06-07T07:10:41ZThe housing game has changed – interest rate hikes hurt more than before<figure><img src="https://images.theconversation.com/files/467402/original/file-20220607-18-kjr6oy.png?ixlib=rb-1.1.0&rect=47%2C669%2C3568%2C1739&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 has lifted the cash rate for the second time in two months, this time by 0.50 points to 0.85%.</p>
<p>It won’t be the last such hike. Forecasters expect the cash rate to hit 2.5% by the end of next year. This would lift the typical variable mortgage rate to near 5%.</p>
<p>Cue the claims that the new generation of borrowers are entitled – they don’t know how good they’ve had it with such low rates.</p>
<p>But the refrain misses the full story. High house prices have changed the game, making it much harder for today’s borrowers.</p>
<p>It is true that even a mortgage rate of 5% is well below the peak of about 17% earlier generations paid at the start of the 1990s. </p>
<p>But the impact of those high rates on overall mortgage interest payments as a share of income was modest, because house prices were much lower then, and mortgages were much smaller.</p>
<hr>
<figure class="align-middle zoomable">
<a href="https://images.theconversation.com/files/467379/original/file-20220607-14-fp9ufr.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/467379/original/file-20220607-14-fp9ufr.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/467379/original/file-20220607-14-fp9ufr.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=294&fit=crop&dpr=1 600w, https://images.theconversation.com/files/467379/original/file-20220607-14-fp9ufr.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=294&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/467379/original/file-20220607-14-fp9ufr.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=294&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/467379/original/file-20220607-14-fp9ufr.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=370&fit=crop&dpr=1 754w, https://images.theconversation.com/files/467379/original/file-20220607-14-fp9ufr.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=370&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/467379/original/file-20220607-14-fp9ufr.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=370&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Projection is for December 2023. It uses the average mortgage interest rate as at December 2021 and assumes household debt-to-income ratio is stable at December 2021 levels.</span>
<span class="attribution"><span class="source">RBA Tables E2 and F6; ABS National Accounts; Grattan analysis.</span></span>
</figcaption>
</figure>
<hr>
<p>Typical house prices used to be about <a href="https://grattan.edu.au/wp-content/uploads/2022/03/Grattan-Institute-Submission-to-the-PC-review-of-the-NHHA.pdf">four times incomes</a>. Now they’re more than eight times incomes, and more in Melbourne and Sydney. </p>
<p>This has meant that for any given mortgage rate, the share of income taken up by mortgage payments is much, much higher.</p>
<hr>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/467414/original/file-20220607-14-i9icwf.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/467414/original/file-20220607-14-i9icwf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/467414/original/file-20220607-14-i9icwf.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=333&fit=crop&dpr=1 600w, https://images.theconversation.com/files/467414/original/file-20220607-14-i9icwf.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=333&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/467414/original/file-20220607-14-i9icwf.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=333&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/467414/original/file-20220607-14-i9icwf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=419&fit=crop&dpr=1 754w, https://images.theconversation.com/files/467414/original/file-20220607-14-i9icwf.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=419&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/467414/original/file-20220607-14-i9icwf.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=419&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Each dot represents a 3-month period.</span>
<span class="attribution"><span class="source">Source: RBA Tables E2 and F6</span></span>
</figcaption>
</figure>
<hr>
<p>If you have a small loan with a high rate, all you need is a cut in rates, some inflation and decent income growth, and your mortgage burden can fall sharply. </p>
<p>That’s how it was for borrowers in the 1990s. High rates stung, but not for long.</p>
<p>Borrowers in the 1990s who started out devoting more than 30% of their income to paying off a mortgage found themselves devoting just 12% by the time the loan was halfway through.</p>
<hr>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/467415/original/file-20220607-15990-oh4qie.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/467415/original/file-20220607-15990-oh4qie.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/467415/original/file-20220607-15990-oh4qie.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=324&fit=crop&dpr=1 600w, https://images.theconversation.com/files/467415/original/file-20220607-15990-oh4qie.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=324&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/467415/original/file-20220607-15990-oh4qie.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=324&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/467415/original/file-20220607-15990-oh4qie.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=407&fit=crop&dpr=1 754w, https://images.theconversation.com/files/467415/original/file-20220607-15990-oh4qie.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=407&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/467415/original/file-20220607-15990-oh4qie.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=407&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Assumes 80% LVR 25-year loan on average house price in year of borrowing, taken from Yates (201 1) for pre-2010, and ABS thereafter. No lenders mortgage insurance.
Income is gross disposable income from ABS National Accounts. Historical interest rates are rolling 3-year averages of standard variable rates (discounted from 2004).
Projected interest rates are average of past 10 years. Projected income growth is 3%.</span>
<span class="attribution"><span class="source">Sources: ABS National Accounts and Residential House Prices; RBA Table F6; Yates (2011); Grattan Analysis</span></span>
</figcaption>
</figure>
<hr>
<p>It’s different if you’ve borrowed recently.</p>
<p>If you’ve taken out a big loan at today’s ultra-low interest rates, there’s only one way your mortgage payments can go – and that’s up.</p>
<h2>5% would hurt like it didn’t used to</h2>
<p>Even if mortgage rates stabilise at around 5% – which is implied by some of the things the Reserve Bank governor has said – and wages grow faster than they have for a decade, the mortgage burdens of millennials who’ve bought houses recently won’t much decline.</p>
<p>The extraordinary increase in house prices and debt means mortgage rates of 7% would be as painful to borrowers today as rates of 17% were decades ago.</p>
<p>It’s a common barb that newer generations are struggling with home ownership and housing costs because of <a href="https://www.latrobe.edu.au/nest/bold-thinking-smashing-myths-smashed-avo/">profligate spending</a>, on smashed avos and the like.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/paying-off-a-home-loan-used-to-be-easier-than-it-looked-its-now-harder-161873">Paying off a home loan used to be easier than it looked. It's now harder</a>
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</em>
</p>
<hr>
<p>But millennials spend less of their incomes on “<a href="https://grattan.edu.au/wp-content/uploads/2019/08/920-Generation-Gap.pdf">discretionary</a>” items – such as alcohol, clothes and household services – than people of the same age did decades ago. </p>
<p>What millennials are spending much more on is housing, simply because houses are so much more expensive.</p>
<p>So as the Reserve Bank continues to increase rates, it’s important to keep in mind that comparisons between then and now miss the full story.</p>
<p>Skyrocketing house prices have changed the game. For millennials, even historically small increases in interest rates will hurt.</p>
<hr>
<p>
<em>
<strong>
Read more:
<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">Expect the RBA to go easy on interest rate hikes from now on – we can't afford rates to climb as steeply as the market expects</a>
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</em>
</p>
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<img src="https://counter.theconversation.com/content/184553/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Grattan Institute began with contributions to its endowment of $15 million from each of the Federal and Victorian Governments, $4 million from BHP Billiton, and $1 million from NAB. In order to safeguard its independence, Grattan Institute's board controls this endowment. The funds are invested and contribute to funding Grattan Institute's activities. Grattan Institute also receives funding from corporates, foundations, and individuals to support its general activities, as disclosed on its website. </span></em></p><p class="fine-print"><em><span>Joey Moloney 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 extraordinary increase in house prices and debt means mortgage rates of 7% would be as painful to borrowers today as rates of 17% were decades ago.Joey Moloney, Senior Associate, Grattan InstituteBrendan Coates, Program Director, Economic Policy, Grattan InstituteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1845632022-06-07T06:58:50Z2022-06-07T06:58:50ZWord from The Hill: Warm smiles in Indonesia, but chillier news at home<p>As well as her interviews with politicians and experts, Politics with Michelle Grattan includes “Word from The Hill”, where she discusses the news with members of The Conversation politics team.</p>
<p>While Anthony Albanese this week continued to receive a warm reception abroad, at home the new government faced more difficult news. In this podcast Michelle and politics + society editor Amanda Dunn canvass Tuesday’s 50 basis points rise in interest rates – the latest cost of living blow for many families – and Albanese’s trip to deepen Australia’s relationship with Indonesia. They also take a look at the new shadow ministry, announced by Peter Dutton and David Littleproud on Sunday.</p><img src="https://counter.theconversation.com/content/184563/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>Michelle Grattan discusses politics with politics + society editor, Amanda DunnMichelle Grattan, Professorial Fellow, 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>
<hr>
<p><iframe id="dfbo1" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/dfbo1/5/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></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>
<hr>
<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>
<hr>
<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>
<hr>
<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>
<hr>
<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>
<hr>
<p>
<em>
<strong>
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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</em>
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<hr>
<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>
<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>
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</em>
</p>
<hr>
<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/1840402022-05-29T19:55:26Z2022-05-29T19:55:26ZOpen letter: the RBA review should be independent of government<p>This is the text of an open letter from 12 leading economists, sent on Sunday:</p>
<p><strong>To the Treasurer, the Hon. Dr Jim Chalmers, MP</strong></p>
<p><em>Ahead of the 2022 election, both major parties committed to conducting an independent review of the Reserve Bank of Australia (RBA).</em> </p>
<p><em>This bipartisanship was welcome and befitted the independent nature of the conduct of monetary policy, which conditional on the RBA’s mandate ought to be beyond the scope of day-to-day politics.</em></p>
<p><em>Now that the election outcome is known, it falls to the new government – and, principally, to you as Treasurer – to establish the terms of reference and logistics for the review process.</em></p>
<p><em>It is critical that a review be conducted but the devil is in the detail – poorly crafted terms of reference have the potential to undermine the efficacy of the review and therefore the future conduct of monetary policy.</em></p>
<p><em>The review presents a once-in-a-generation opportunity.</em></p>
<p><em>The conduct of monetary policy is critical to the functioning of the Australian economy and through it the welfare of every Australian.</em> </p>
<p><em>Recent decades have seen the Australian economy buffeted by unprecedented external shocks, which have necessitated rapid adaptation of both monetary and fiscal policy. Meanwhile economies across the world have experienced a long-run secular decline in economic growth and real interest rates.</em></p>
<p><em>Now is the time for a wide-ranging, independent review of our monetary policy framework and our monetary authority.</em> </p>
<p><em>With that in mind, it is our assessment that the review should:</em></p>
<ul>
<li><p><em>be independent, both of the RBA and government</em></p></li>
<li><p><em>be headed by an internationally recognised foreign expert</em></p></li>
<li><p><em>be wide-ranging, encompassing the Reserve Bank Act, the Statement on the Conduct of Monetary Policy, and the RBA as an institution including its responsibilities, its structure and culture, the composition and appointment of its board, and the ways in which it communicates with the public</em></p></li>
<li><p><em>be concerned both with past performance and how well the RBA is placed to handle future challenges</em></p></li>
<li><p><em>explicitly consider the interaction between fiscal and monetary policy.</em></p></li>
</ul>
<p><em>Full independence is crucial if the review is to make the most of this unique opportunity. No institution can be expected to independently or credibly review itself. A foreign perspective would bring valuable external scrutiny to the process and enable a benchmarking of the RBA against its overseas counterparts.</em></p>
<p><em>The review should not be seen as a performance appraisal of a particular regime or individual—rather, it speaks to the performance of the fundamental institutions governing the decision-making process.</em></p>
<p><em>It is common for reviews of central banks to be led by foreign experts.</em></p>
<p><em>Examples include:</em></p>
<ul>
<li><p><em>the RBNZ review by Lars Svensson in 2001</em></p></li>
<li><p><em>reviews of the Bank of England by Donald Kohn in 2000, David Stockton in 2012, and David Warsh in 2014</em></p></li>
<li><p><em>reviews of the Riksbank by Francesco Giavazzi and Frederic Mishkin in 2006, by Charles Goodhart and Jean-Charles Rochet in 2011, by Marvin Goodfriend and Mervyn King in 2016, and by Karnit Flug and Patrick Honohan in 2022</em></p></li>
<li><p><em>the review of the Bank for International Settlements by Franklin Allen, Charles Bean, and Jose De Gregorio in 2016.</em></p></li>
</ul>
<p><em>We are energised by the prospect of a review and optimistic for what it may achieve. Australia is counting on it.</em></p>
<p><em>Yours Sincerely,</em></p>
<p><em><a href="https://theconversation.com/profiles/begona-dominguez-1222514">Begoña Dominguez</a>, Professor of Economics, The University of Queensland</em></p>
<p><em><a href="https://theconversation.com/profiles/chris-edmond-673265">Chris Edmond</a>, Professor of Economics, The University of Melbourne</em></p>
<p><em><a href="https://theconversation.com/profiles/saul-eslake-665">Saul Eslake</a>, Corinna Advisory and Vice-Chancellor’s Fellow, The University of Tasmania</em></p>
<p><em><a href="https://theconversation.com/profiles/renee-fry-mckibbin-673270">Renée Fry-McKibbin</a>, Professor and Interim Director, Crawford School of Public Policy</em></p>
<p><em><a href="https://theconversation.com/profiles/steven-hamilton-155869">Steven Hamilton</a>, Assistant Professor of Economics, The George Washington University</em></p>
<p><em><a href="https://theconversation.com/profiles/richard-holden-118107">Richard Holden</a>, Professor of Economics, UNSW Business School</em></p>
<p><em><a href="https://theconversation.com/profiles/warwick-j-mckibbin-9129">Warwick McKibbin</a>, Distinguished Professor, Crawford School of Public Policy</em></p>
<p><em><a href="https://theconversation.com/profiles/john-quiggin-2084">John Quiggin</a>, Professor of Economics, The University of Queensland</em></p>
<p><em><a href="https://www.unsw.edu.au/staff/kristle-romero-cortes">Kristle Romero Cortés</a>, Associate Professor of Banking and Finance, UNSW</em> </p>
<p><em><a href="https://www2.deloitte.com/au/en/profiles/chris-richardson.html">Chris Richardson</a>, Partner, Deloitte Access Economics</em></p>
<p><em><a href="https://www.cis.org.au/person/peter-tulip/">Peter Tulip</a>, Chief Economist, Centre for Independent Studies</em></p>
<p><em><a href="https://theconversation.com/profiles/danielle-wood-147710">Danielle Wood</a>, CEO, Grattan Institute</em></p>
<hr>
<p>Warwick McKibbin is a former member of the Reserve Bank board. Peter Tulip is a former manager of research at the Reserve Bank.</p><img src="https://counter.theconversation.com/content/184040/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Warwick McKibbin is a former member of the Reserve Bank board.</span></em></p><p class="fine-print"><em><span>Begoña Dominguez, Chris Edmond, Danielle Wood, John Quiggin, Renee McKibbin, Richard Holden, Saul Eslake, and Steven Hamilton do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The independent review of the Reserve Bank should be headed by someone from outside the country say 12 leading economists in an open letter to the treasurer.Steven Hamilton, Visiting Fellow, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National UniversityBegoña Dominguez, Professor of Economics, The University of QueenslandChris Edmond, Professor of Economics, The University of MelbourneDanielle Wood, Chief executive officer, Grattan InstituteJohn Quiggin, Professor, School of Economics, The University of QueenslandRenee McKibbin, Professor of Economics, Crawford School of Public Policy, Australian National UniversityRichard Holden, Professor of Economics, UNSW SydneySaul Eslake, Vice-Chancellor’s Fellow, University of TasmaniaWarwick J. McKibbin, Distinguished Professor of Economics and Public Policy, ANU Centre for Applied Macroeconomic Analysis (CAMA), Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1838132022-05-25T02:41:28Z2022-05-25T02:41:28ZPolitics with Michelle Grattan: Treasurer Jim Chalmers on the ‘spiky’ parts of Australia’s inflation problem<p>New treasurer Jim Chalmers has been in multiple briefings since Sunday, and the message he sends in this podcast is that he is not going to try to gild the economic lily with the Australian community.</p>
<p>He intends to deliver a “pretty blunt, pretty frank” assessment of Australia’s challenges in an economic statement to parliament soon after it returns in June or July.</p>
<p>Chalmers highlights two particularly “spiky” bits of Australia’s inflation problem that are under “extreme pressure” at the moment – power prices and the building industry as the cost of materials rise.</p>
<p>Ahead of his first budget planned for October, Chalmers reaffirms he is “highly unlikely” to be able to renew the temporary six-month cut in petrol excise when it expires in September. </p>
<p>If there was “more we can responsibly do, we will”, but people shouldn’t assume that the cost of living relief in the March budget will continue forever.</p>
<p>Meanwhile Chalmers and finance minister Katy Gallagher are already combing through the numbers to get savings from areas they identify as wasteful spending.</p>
<p>He also speaks about the employment summit planned for early in Labor’s term – which he wants to have a “broad focus” – and cautions against assuming the unemployment rate (at present 3.9%) will be “on a kind of a permanent downward trajectory” given rising interest rates and international uncertainly.</p>
<p>He raises the prospect of changes to the Reserve Bank’s mandate which at present encompasses full employment and price stability, saying that would a matter for an inquiry he promised in opposition and will shortly set up.</p>
<p><strong>TRANSCRIPT</strong></p>
<p>MICHELLE GRATTAN, HOST: Jim Chalmers, in the hours of briefings you’ve received, what’s been the most surprising thing you’ve learned, something that you hadn’t realised or hadn’t so much appreciated before?</p>
<p>JIM CHALMERS, TREASURER: I think a lot of it has been unsurprising. We’ve got a problem with inflation in this economy that we’re inheriting, and that’s why we’re going to have more interest rate rises according to the Reserve Bank. We’ve got real wages falling and we’ve got a trillion dollars of debt with not enough to show for it. On the specifics of the briefing - and I’ve been sitting with Treasury really since Sunday, in these rolling briefings - and I think that there are two particularly spiky parts of the inflation problem, which are very pressing. Power prices are spiking - which is going to put extra pressure on Australians - and there are acute pressures on our building industry because in lots of instances they signed contracts twelve or eighteen months ago and then we’ve had this spike in inflation under the former Government, which has impacted on building materials and the like, which has put them under extreme pressure. So, the broad contours of the challenge are familiar to me, but there are very specific, very pressing problems that we’ve inherited as well. </p>
<p>GRATTAN: Well, just going to those problems that you named, what can be done or how will you approach them?</p>
<p>CHALMERS: I think our responsibility is to recognise that the challenges are so serious in our economy that we’ve inherited - and not just as a consequence of COVID but in many instances, for example, in wages - as a consequence of what I see as almost a decade of economic mismanagement, is that we have to work out where we can meaningfully make a difference. One of the reasons why Katy Gallagher and I have said we’ll hand down a Budget in October, rather than wait for May, is because we’ve got to make sure the Budget is reoriented away from political spending towards spending where we get an economic dividend. That’s our responsibility and that’s our mission, really. So, we’ve already begun going through the Budget line by line to see where we can improve the quality of spending, we can take money that might have been rorted or wasted in the past and invest it in good economic outcomes: cleaner and cheaper energy, better child care and aged care, investing in advanced manufacturing, getting real wages moving again. That hard work has already begun. You’ll see the fruits of that in the October Budget. </p>
<p>GRATTAN: Just taking power prices though, and looking at the shorter term, rather than the longer term, I know you’ve got investment plans and so on, but what can you do in the immediate term? </p>
<p>CHALMERS: In the last Budget, the Government and the Opposition agreed on a package of cost‑of‑living relief, as you know, which in most cases runs out later in the year, but that is an important part of providing some relief at least in the near term from these cost of living pressures. We need to remember as well that the Reserve Bank and the Treasury have said that this inflation problem that we’ve inherited from the Liberals is going to get worse before it gets better. There’s some near-term support in the economy, and that’s important for people to deal with these challenges. What we’ve tried to focus on is what happens after that support runs out? What responsible, sustainable, enduring cost of living relief can we build in from our economic policies and plans? That’s why our Powering Australia Plan - which is more important in the context of spiking energy costs - is about improving cleaner and cheaper energy into the system, so that we can get those power bills down. Our child care policy, which kicks in next year, is all about getting those bills down substantially. Our cheaper medicines plan is all about getting medicine costs down next year. These sorts of things will make a meaningful difference when the current cost of living relief runs out.</p>
<p>GRATTAN: Won’t you have to deal with some interim relief after this six months’ relief that the former Government gave, or will you let that pass? </p>
<p>CHALMERS: We’ve got to be upfront about it. We will always do the best that we can in the context of these pretty severe Budget constraints that we’re inheriting. When you inherit a trillion dollars in debt, then you have to be upfront with people and say: “We can’t do everything that we would like to do. There’s not room in a Budget heaving with that much debt for even all of the good ideas.” So you need to weigh up your priorities. What I’ve tried to do – and I want to engage the Australian people in a big national conversation about our economic challenges, because I think people do appreciate you can’t do everything as a Government; you need to be realistic and responsible and that’s what we intend to be. And so, when some of that relief runs out, it won’t be possible in a Budget heaving with that much debt, to extend some of those measures forever. I said that before the election, and I say that again after the election. We will work with people responsibly to see what relief we can continue to provide.</p>
<p>GRATTAN: So there will be no extension to the petrol excise cut?</p>
<p>CHALMERS: It’s highly unlikely to see that extended. We said that before the election. We were upfront about it. And after the election…</p>
<p>GRATTAN: That’s still your position?</p>
<p>CHALMERS: …that’s still our position. We will be handing down a Budget in October. If there’s more that we can responsibly do, we will, but people shouldn’t assume that the cost of living relief that was in the Budget earlier in the year will continue forever.</p>
<p>GRATTAN: Now, you’ve talked a lot about the need for real wages growth. How can you get wages growth up?</p>
<p>CHALMERS: I think the most important place to start is to get a good outcome out of the Fair Work Commission for the lowest paid workers. We’re talking here in many cases about the heroes of the pandemic making $20.33 an hour during a cost of living crisis, which is obviously not acceptable to us and we said a lot about that during the election campaign. A great place to start if you want to get real wages moving again… </p>
<p>GRATTAN: Just on that, there was a lot of talk about whether you put that 5.1 per cent inflation rise into the submission, as to what you wanted. Will you actually have a number in that submission and when will that new submission go in?</p>
<p>CHALMERS: Yes, so it’s important to understand that the process is already well underway. They received submissions before the election. Clearly, there’s an opportunity for a new Government to submit another submission, and I will be talking with Tony Burke and Anthony Albanese about the best way to do that. But our view is already incredibly clear. There’s nobody at the Fair Work Commission who hasn’t heard that our position is that we want to see low-wage workers keep up with the skyrocketing cost of living. That’s a good place to start. We’ve got broader plans on real wages. The best way to get real wages growing is to train people for higher wage opportunities, is to make it easier for parents to work more and earn more if they want to, and to invest in industries where there are secure, well‑paid jobs, like advanced manufacturing and the care economy and the like. If you do all of those things, you do give yourself a chance to get real wages growing again.</p>
<p>GRATTAN: Well, what about leading by example? The wage growth in the public sector has fallen behind the wage growth in the private sector. What about a wage rise for public servants?</p>
<p>CHALMERS: Katy Gallagher is obviously the responsible Minister there. She’s the Minister for Public Service as well as the Minister for Finance and so I don’t want to kind of pre-empt any considerations or conversations that Katy might be having. My priority is in the economy more broadly in the ways that I’ve just described. I think real wages falling in the way that they have been is, in many ways, the defining challenge in the economy because it combines this high and rising inflation during this cost of living crisis, with the fact that people are falling further and further behind. It’s not good economic management if people can’t put food on the table and get ahead. If I think about what I’ve inherited from Josh Frydenberg, a lot of people focus on the trillion dollars in debt, which is very important. A lot of people focus on inflation, very important. But where it all comes together and where our choices are constrained, is when it comes to people falling further and further behind. We want the national economy to grow, but we want people to actually have a slice of the action as it does.</p>
<p>GRATTAN: Labor has promised a jobs summit as one of its first acts. Now, what will this do and will this be one of those sorts of quick and dirty summits that everybody comes, talks for an afternoon and that’s it, or will it be more like the Hawke Summit of 1983 when, in fact, people were here for nearly a week, I think, maybe a whole week, and there was a lot of pretty serious debate?</p>
<p>CHALMERS: We want it to be a serious discussion. I think there’s a really substantial appetite in the Australian community - certainly in the business community, the unions, the community sector, employers and employees, and businesses of all sizes - there’s genuinely an appetite for us to get together and work out where the common ground is. I thought – the thing that really fired me up about Anthony Albanese’s victory speech on Saturday night - is when he talked about the common ground where we plant our aspirations together, and that’s what the Summit would be about. We also need to understand that even with the unemployment rate having fallen in welcome ways, there’s still challenges around skill shortages, real wages, the gender pay gap. There’s a whole range of challenges in our labour market, which we’ll only solve if we work together. I think Anthony is uniquely placed to provide that kind of leadership. He is by nature an inclusive person. He’s an empowering person. You see that in the way that he treats us in his own team. We want to tap that spirit, we want to tap that appetite around Australia, see what we can agree and work out together. The logistics of the Summit will be worked out in due course, and we’ll have more to say about it, but that’s the spirit that we want to capture.</p>
<p>GRATTAN: But it would be a summit of more than one day?</p>
<p>CHALMERS: I’m not sure, to be honest Michelle. Those details haven’t been worked out. We know what we want from it, and we’ll work backwards from that.</p>
<p>GRATTAN: What you want is a set of ideas across the economy or a more narrow focus?</p>
<p>CHALMERS: We want a broad focus because, as I said, I think too often people think that the unemployment rate tells the full story of the labour market, and it just doesn’t. You want it as low as possible, you welcome it when it falls, but you want people to understand that there’s a lot of issues at play in the labour market. We’ve had a lot of job insecurity. We’ve got the wages share hasn’t kept up. We’ve had a whole bunch of issues around gender pay. So, ideally, given people’s interest and appetite to work together, ideally, it would have a relatively broad agenda.</p>
<p>GRATTAN: We’ll come back to the labour market, but just on this question of inflation - how high do you think it will go? Do you think that the estimates that we’ve heard earlier need to be updated or are being updated?</p>
<p>CHALMERS: Both the Reserve Bank and the Treasury have substantially lifted their expectations for inflation and both of those institutions think that inflation will get worse before it gets better, because it’s on a trajectory that can’t easily be turned around. So, even between the Budget only a couple of months ago and the Pre‑Election Outlook the expectations for inflation have changed substantially. Inflation is high and rising. The Reserve Bank has said publicly there will be more interest rate rises. We are already on that trajectory throughout the course of this year, and so the inflation problem was getting worse, not better, when the Government changed hands.</p>
<p>GRATTAN: Are those estimates still changing or not?</p>
<p>CHALMERS: Well, they don’t get updated, you know, kind of weekly, but clearly…</p>
<p>GRATTAN: Only for a new Government.</p>
<p>CHALMERS: Clearly, people’s expectations are inflation has been getting worse not better. But what I would like to do, what I intend to do, is to deliver a pretty detailed economic statement to the parliament when it returns. Whether that’s in June or July, that’s not clear yet, but I want to give a pretty blunt, pretty frank assessment of our economic challenges to the parliament as part of bringing the nation into our confidence about these challenges and inflation is a huge part of that story. Obviously, in the usual way, the forecast will be updated in October.</p>
<p>GRATTAN: So, as things stand though, we’re headed to inflation of, I think, it was more than six per cent; is that right?</p>
<p>CHALMERS: That’s what the Reserve Bank and the Treasury have been saying publicly, and if that needs to be updated, it will be.</p>
<p>GRATTAN: In terms of the October Budget, what sort of things can we expect from that?</p>
<p>CHALMERS: I think, most importantly, the October Budget will do two main things. It will implement our commitments because they’re important to securing the recovery and trying to grow the economy without adding to inflation and getting real wages moving again. So, that’s a big part of the story. But we have already begun going through the Budget line by line to see where we can redirect that unproductive, wasteful spending into areas where we get an economic dividend. We’ve begun that work. Katy has with Finance, and I have with Treasury, already, and so ideally, the October Budget will see the fruits of some of that work.</p>
<p>GRATTAN: It sounds sort of benign, I must say, when you say, “Well, we’re going to get rid of all the rorts and we’re just going to have fewer contractors and so on”, but for meaningful reviews of spending, aren’t you going to have to really go much deeper than that? Aren’t there going to be some nasties in that Budget?</p>
<p>CHALMERS: Well, I wouldn’t necessarily describe it like that. But clearly, if we find opportunities to trim spending where we’re not getting an economic dividend for the Australian people, then we will grab those. Because you can’t ignore the fact that for the first time in the history of this country, an incoming Government is inheriting a trillion dollars of debt, so we take that challenge seriously. Katy Gallagher and I released, in Parliament House during the election campaign , $11.5 billion in Budget improvements – a combination of trimming spending, a combination of unwinding reports and waste, and a combination of multinational tax reform – and that does not have a lot of attention Michelle, but $11.5 billion is a pretty decent start.</p>
<p>GRATTAN: Yes, but what’s the deficit?</p>
<p>CHALMERS: Yes, but it’s a pretty decent start. You have to begin somewhere. We need to be upfront with all of your listeners and say nobody can flick a switch and make a trillion dollars of debt disappear, but you have to start. You have to take the challenge seriously and that’s what we’re doing.</p>
<p>GRATTAN: Might you begin, for example, with the National Party’s dams. They secured some $6 billion for the dams in the election. Is this the sort of thing you’d look at or would you want some supporting analysis for the benefit of that spending?</p>
<p>CHALMERS: Obviously, the cost–benefit analysis and the business case is really important. Take Hells Gate Dam, for example, in North Queensland. We have said that you could save about $500 million if you take the time to do the business case properly, and that means starting a year later. So that’s a good example of the type of thing that you’re talking about. We want to build infrastructure in the regions. If we want the national economy to recover strongly, the regions need to be a big part of the story, but that means getting maximum bang for buck for these investments. Clearly, part of our task is to make sure that we are getting an economic dividend not just a political dividend for the National Party, which has been the approach for too long.</p>
<p>GRATTAN: Now, one of your meetings today, I think, will be with the Reserve Bank Governor; is that right? And you’ve promised an inquiry into the way the bank has been doing its job. What do you want to get out of that inquiry?</p>
<p>CHALMERS: Roday I will be meeting with the Reserve Bank Governor, but also the heads of all the major regulators - including the Energy Regulator, APRA and ASIC - and I will be meeting with them in Canberra today. I’ve known and worked with Governor Lowe for some time, and I want to engage him in a conversation about this Reserve Bank review. I want to do it in a collaborative way. I’m not interested in people taking shots at the Governor or at the Bank, I’m interested in making sure that we get the monetary policy regime right and that it interacts with Government policy effectively. So I will be talking with Governor Lowe about that. I’ve had a handful of conversations with him about it already and before too long we hope to be able to set the parameters of that review. It’s really important, there hasn’t been a review like that for some time. We’ve had this remarkable period in our economy. We’ve had historically low interest rates that are rising now, and so we want to have a look at the regime and make sure it’s fit for purpose and it’s delivering what we need it to for the Australian people. </p>
<p>GRATTAN: Well, it’s certainly struggled with its forecasts recently, hasn’t it? Is the entire way that it’s run up for grabs? For example, would you want to see more economists on the board?</p>
<p>CHALMERS: We’ll settle the terms of reference before too long, and clearly those sorts of issues will be part of the conversation, but how specific we want to be with that we’ll have more to say about it at a later stage. The composition of the Board is important, but also the making sure that the targets are appropriate, the objectives are appropriate, the intersection between monetary policy and fiscal policy is appropriate. So that may be a consideration, but it will be much broader than that.</p>
<p>GRATTAN: Coming back to the labour market, are you committed to driving unemployment down further? It’s now got a three in front of it. Is it indeed possible to get it much further down?</p>
<p>CHALMERS: Well, it remains to be seen. Obviously, we want to drive unemployment as low as we can, but we also want to deal with long‑term unemployment, we want to deal with some of those other issues we’ve already talked about - wages, gender, job insecurity - and we’ve got some plans around all of that. We want the unemployment rate as low as it can be. It may be that it bounces around a little bit as interest rates rise. We shouldn’t assume that it’s on a permanent downward trajectory. We’ve got rising interest rates, we’ve got these big challenges with inflation, we’ve got some international uncertainty as well. So we need to be realistic about all of that. But if we can get unemployment down as low as possible that’s a good thing, and we want to satisfy those other economic objectives too.</p>
<p>GRATTAN: Employers are obviously screaming about the difficulty of getting workers. What do you see as the answer to that apart from your agenda to improve skills, which again will take a while?</p>
<p>CHALMERS: Yeah.</p>
<p>GRATTAN: What about the here and now?</p>
<p>CHALMERS: Well, skills are the most important part of it. We’ve got a big commitment there on fee‑free TAFE, whether it’s skill shortages, but I think that’s the most important part.</p>
<p>GRATTAN: That doesn’t help the man with the coffee shop.</p>
<p>CHALMERS: Understood. I think child care is a big part of this story. We’ve actually got this enormous pool of untapped workers who are discouraged from working more because it costs so much to put kids into child care. I know from personal experience what the childcare system is like, and for too many families they’re priced out of it. For too many families it doesn’t make sense to work more because the extra money you earn just goes into child care. So that’s one of the primary reasons we see child care reform not as social security but as a key economic reform to boost participation, in the economic jargon, which really just means we want to make it easier for people. If they want to work more and earn more, we want to make it worth their while, and that will make a difference to skills shortages and labour shortages. Clearly, migration is part of the story. Clearly, there’s a lot of good ideas floating around about how we get older workers back into work, part‑time perhaps. So it will take a combination of all of those things, but I genuinely believe that training and child care are two of the most important planks. I feel like too often child care is kind of dismissed as some kind of non-economic thing. Obviously, it eases cost‑of‑living pressures. Obviously, it’s good for kids to have them in the early education system. Parents notice the difference in social skills, in counting and reading and all the rest of it, it gives them a head-start as they head into kindy or preschool. That’s all part of it. But it’s a hard‑edged, hard‑headed key economic reform so that businesses can find more workers as well.</p>
<p>GRATTAN: Of course, there’s also the argument that if you have families, both parents, working too much, you create other problems, don’t you? This whole family–work balance doesn’t operate very well.</p>
<p>CHALMERS: Obviously that’s a challenge and we want families to be able to choose subject to their own circumstances. That’s what it’s really about. We don’t want child care to be so expensive that people have no choice. We want them to be able to choose what’s best for them. And I think we learned a lot about working family and home responsibilities during the pandemic, during the lockdowns; and during this kind of hybrid economy, where people are doing a combination of working from home and going to work. We learned a lot about what we really value. Superficially, we think it wasn’t bad a couple of days a week if you could to kind of work on Zoom, wandering around in trackie daks around your house and all the rest of it. But the big benefit of it was you get to spend more time with your kids. So, I think every family, in one way or another, is kind of weighing up: what’s the best version of this for our own circumstances? And what we would like to do is give people a broader array of choices by making it easier for them if they want to work more and earn more, to make the child care system more conducive to that.</p>
<p>GRATTAN: Just finally, on this question of immigration, it does seem that in recent months both sides of politics have been a bit wary, a bit coy, about talking about what sort of immigration levels are most desirable. We had, before the pandemic, obviously, unease about very high</p>
<p>immigration in some circles at least. Now we desperately need more immigrants. What’s your view of this and how do you go about scaling up immigration without putting too much pressure on other things like housing, for example?</p>
<p>CHALMERS: Yeah, those are the considerations we need to balance. One of the tragedies, frankly, of losing Kristina Keneally from our team , was she was doing a heap of work on – and all of us were doing a heap of work on - how do we make sure that as the migration system gets up and running again after it was closed down - effectively for a couple of years - how do we make sure that it’s the best version of the system, the best version between temporary and permanent, the best balance between skilled and unskilled, the best balance between all the family reunion and all the rest of it, so that we’re getting the best outcomes for our people and for our country? Now, I am personally a huge believer in migration.</p>
<p>GRATTAN: “Big Australia” man?</p>
<p>CHALMERS: Nobody uses those terms, but I know from my own community, migration strengthens our society, but also as someone involved in the economy, how it strengthens our economy. But we need to make it right and we need to make sure that we’ve got the settings perfectly right. I talk to business a lot and what I say to them privately and what I’m happy to say to all of your listeners, is that obviously there is a role for skilled migration, but it should never be a substitute for training. We shouldn’t have this kind of false binary between you either choosing migration or you choosing training. Obviously, it’s a combination of those two things, in addition to child care and some of these other issues we’ve talked about. That’s how we get the right mix of workers in the economy. We want to be responsible and reasonable about that. We were having discussions with the business community before the election and we will after the election as well, but migration will play a role.</p>
<p>GRATTAN: Jim Chalmers, thank you very much for being our first Minister in the new Government to talk with our podcast. And thank you to my producer Ellen Duffy. We will be back with another interview soon, but that’s all for now.</p><img src="https://counter.theconversation.com/content/183813/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>Michelle Grattan speaks with the New Treasurer Jim Chalmers as he intends to deliver a "pretty blunt, pretty frank" assessment of Australia's challenges to parliament soon after it returnsMichelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1832262022-05-19T07:56:24Z2022-05-19T07:56:24ZAt 3.9%, Australia’s unemployment rate now officially begins with ‘3’<figure><img src="https://images.theconversation.com/files/464168/original/file-20220519-12-7to7r9.png?ixlib=rb-1.1.0&rect=1166%2C237%2C1006%2C618&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>Early in the election campaign, on April 14, we learned that Australia’s unemployment rate had slipped below 4% in March, to <a href="https://theconversation.com/technically-unemployment-now-begins-with-a-3-how-to-keep-it-there-181242">3.95%</a> – the lowest rate in 48 years.</p>
<p>But the Coalition was denied the bragging rights that would flow from an unemployment rate beginning with “3” because of a Bureau of Statistics convention of quoting the rate to only one decimal place, which meant the rate was presented as “4.0%”, the same as the month before (when it was actually 4.04%).</p>
<p>Thursday’s figure, for the month of April, has broken the barrier. Officially 3.9% (and actually <a href="https://www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-force-australia/latest-release">3.85%</a>), it is clearly below 4% for the second consecutive month (because the March figure has been revised downwards to also round to 3.9%).</p>
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Read more:
<a href="https://theconversation.com/technically-unemployment-now-begins-with-a-3-how-to-keep-it-there-181242">Technically unemployment now begins with a '3'. How to keep it there?</a>
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<p>It means the unemployment rate has decisively broken out of the band of 5-6% it has been in or near for the past two decades and slipped below 4%.</p>
<p>It has fallen to where it was a half-century ago when (in the days the survey was quarterly) it jumped from 3.7% to 5.4% between November 1974 and February 1975.</p>
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<p>Of course, 3.9% is an average. Over the country, the unemployment rate ranges from lows of 2.9% in Western Australia and 3.1% in the Australian Capital Territory, to highs of 4.5% in Queensland and South Australia.</p>
<p>For women, the rate is an almost half-century low of 3.7%, less than the 14-year low of 4.0% for men.</p>
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<p>Australia <a href="https://data.oecd.org/unemp/unemployment-rate.htm">isn’t alone</a>. The unemployment rate is below 4% in the United States, the United Kingdom and New Zealand; and below 3% in Japan, Germany and Korea.</p>
<p>Further declines are expected. The Reserve Bank is forecasting unemployment of <a href="https://www.rba.gov.au/publications/smp/2022/may/pdf/forecast-table-2022-05.pdf">3.6% by 2023</a>, a few points less than the Treasury, which is forecasting <a href="https://budget.gov.au/2022-23/content/bp1/download/bp1_bs-1.pdf">3.75%</a>.</p>
<p>But the Bank is modest about its forecasting ability. It only claims to be 90% confident that by mid-2024 the rate will be somewhere between 2% and 5%.</p>
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<p>At a press conference to release Labor’s <a href="https://cdn.theconversation.com/static_files/files/2108/ALP_Election_Costing_2022_FINAL_-_Copy.pdf">election policy costings</a> hours after the employment numbers were released, Labor treasury spokesman Jim Chalmers held out the prospect of more optimistic forecasts in Labor’s first budget as a result of the net $7.4 billion of extra spending it is proposing.</p>
<p>He said he would work with the Treasury if elected to ensure the dividends of Labor’s investments in childcare, training and energy were reflected in those forecasts.</p>
<h2>The improvement is real</h2>
<p>Sometimes the unemployment rate can be misleading. It can fall because people have left their jobs and are too despondent to search for new ones, meaning they are classified as “<a href="https://theconversation.com/forget-the-election-gaffes-australias-unemployment-rate-is-good-news-and-set-to-get-even-better-by-polling-day-181141">not in the labour force</a>” rather than unemployed.</p>
<p>And it can fall even though people are less fully employed, working fewer hours than they did (in accordance with an international convention, <a href="https://twitter.com/Bjorn_Jarvis/status/1513991565760376834">one hour per week</a> is all that’s needed to be “employed”).</p>
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Read more:
<a href="https://theconversation.com/forget-the-election-gaffes-australias-unemployment-rate-is-good-news-and-set-to-get-even-better-by-polling-day-181141">Forget the election gaffes: Australia's unemployment rate is good news – and set to get even better by polling day</a>
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<p>But in these figures the share of the working age population in work remains at an all-time high of <a href="https://www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-force-australia/mar-2022#">63.8%</a>, well above the 62.4% before the COVID crisis and the hundreds of billions of dollars spent in response from March 2020.</p>
<p>The number of hours worked rose in April to a record 1,833 million hours.</p>
<p>Underemployment – the proportion of people working fewer hours than they would like – fell to a fresh 14-year low of 6.1%.</p>
<h2>Wages missing out</h2>
<p>Australia’s steadily falling unemployment rates have to date had little effect on wages growth. The figures released on Wednesday showed wages grew <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/wage-price-index-australia/mar-2022">2.4%</a> in the year to March, up only marginally on the 2.3% in the year to December.</p>
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<p>The Reserve Bank says its <a href="https://www.rba.gov.au/monetary-policy/rba-board-minutes/2022/2022-05-03.html">business liaison programme</a> is giving it a more positive picture, with firms telling it they are having to pay to attract and retain staff.</p>
<p>The Bank is forecasting annual wages growth of <a href="https://www.rba.gov.au/publications/smp/2022/may/pdf/forecast-table-2022-05.pdf">3%</a> by December and 3.5% by December 2023, but it concedes its wage growth forecasts have been overoptimistic in the past, producing higher numbers than eventuated in most of the <a href="https://www.rba.gov.au/speeches/2021/sp-gov-2021-07-08.html">past ten years</a>.</p>
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<p>The Bank remains hopeful. Previous dips in unemployment, in 2008 and 2010, boosted wages growth. </p>
<p>A recent study by two of its economists finds that in the locations where unemployment fell <a href="https://www.rba.gov.au/publications/rdp/2021/2021-09/full.html">below 4%</a> in the decade before COVID, wages grew the most.</p>
<h2>Higher rates in store</h2>
<p>The most immediate impact of Thursday’s very welcome news on unemployment will be confirmation within Reserve Bank HQ that the economy can withstand further increases in interest rates. </p>
<p>The next increase is likely a fortnight after the next government takes office, following the Bank’s June board meeting on Tuesday June 7.</p>
<p>Only if it gets clear evidence that wages aren’t climbing as it expects is it likely to consider changing course.</p><img src="https://counter.theconversation.com/content/183226/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Hawkins was formerly a senior economist in the Reserve Bank of Australia and the Australian Treasury.</span></em></p>The share of the population in work has hit an all-time high as the share of the workforce underemployed has hit a 14-year low. The fresh low in unemployment will bring higher interest rates, and perhaps higher wages.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/1823422022-05-03T12:50:44Z2022-05-03T12:50:44ZView from The Hill: The interest rate rise is a political wild card<p>The Reserve Bank, as expected, has thrown its wild card into the election campaign, but neither government nor opposition can be sure which side will be more damaged, or advantaged, by it. </p>
<p>Tuesday’s interest rate rise had been anticipated, was inevitable, and is the result substantially (though not entirely) of external forces. As to its timing: given the recent big inflation spike, the bank could not credibly have held off for another month. </p>
<p>Governor Philip Lowe made it clear the (independent) bank did not take into account any political considerations, in what is the first rise during a campaign since 2007, the election John Howard lost. “The election has no influence at all on today’s decision,” Lowe said.</p>
<p>But the decision feeds into this volatile battle, so will have political fallout. It will affect voters’ mood and anxieties. They may attribute blame.</p>
<p>It was obvious the extraordinarily low interest rates from the height of the pandemic could not and would not last. But many people (and, earlier, the Reserve Bank itself) had not expected rates to start to move up again as soon as this.</p>
<p>Indeed, at one stage the bank said it did not anticipate an increase before 2024. Not only was it wrong in that judgement, but some critics are now saying it should have acted earlier than now to raise rates.</p>
<p>The bank is starting on a road to “normalise” rates. The trouble is that the totally abnormal levels necessary in the COVID economy have become “normal” in the minds of many people, some of whom used them to bid up home prices in the expectation they would be able to afford the payments. </p>
<p>The rise of 25 basis points, taking the cash rate to 0.35%, was larger than the economic experts had been forecasting. But it is not just this one rise that will have an impact on voters’ calculations. Lowe made it plain more will follow, indicating the official rate will probably reach 2.5% at some unspecified time. </p>
<p>Some people are well placed at the moment to deal with this increase, having fixed rate mortgages and money put away. But others are not. </p>
<p>And, crucially, the rise comes on top of living costs going up on many other fronts. This will make it difficult for many people to cope. Some, even if not over-stretched immediately, will be anxious about how they will be placed in the future, such as when the fixed rate on their mortgage ends. </p>
<p>Politically, there will be cross currents. </p>
<p>The Essential poll, released on Tuesday, showed cost of living at the top of issues important to people “when it comes to voting at this year’s federal election”: 47% said it was “very important”, and 32% said was “important”. </p>
<p>Significantly, when people were asked which party they trusted more to manage various issues, on cost of living 40% said Labor, 30% said the Coalition, and 30% saw no difference. </p>
<p>That result is bad for the government. It suggests while polls usually give the Coalition the edge on economic management, when the economy issue gets down to the nitty gritty of household budgets, the government’s advantage may evaporate. </p>
<p>Morrison is also hoist on his own petard. On Monday, asked whether a rate rise would hurt the Coalition, the PM said, “It’s not about what it means for politics. I mean, sometimes you guys always think, see things, through a totally political lens.”</p>
<p>But of course Morrison mostly puts a political frame around economic data, extracting as much credit as possible when it’s good. So it would not be surprising if he cops a political backlash for something basically out of his control. </p>
<p>Morrison argued on Tuesday the government had provided a “shield” for Australians in the budget against cost of living pressures, just as it had provided them with an economic “shield” during the pandemic. (The government on Tuesday quickly announced that if re-elected it would freeze for two years the “deeming” rate used to determine the income earned by pensioners and beneficiaries from financial assets “to ensure payments are not reduced as earnings increase from deposit accounts held by social security recipients”. The PM described this as another “shield”.)</p>
<p>But Morrison’s basic pitch is that the rate rise reinforces the case for this not being a time for voters to risk switching to an alternative without an economic plan and an opposition leader who couldn’t remember some basic statistics. </p>
<p>The government will ramp up its “don’t risk it” warning even further in coming days. Negative messages are powerful in elections. But whether Morrison, himself viewed so negatively by voters, can drive this one home is another matter.</p><img src="https://counter.theconversation.com/content/182342/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 Reserve Bank, as expected, has thrown its grenade into the election campaign, but neither government nor opposition can be sure which side will be more damaged, or advantaged, by the explosion.Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1823392022-05-03T08:33:14Z2022-05-03T08:33:14ZPolitics with Michelle Grattan: On the rate rise, Albanese’s launch and what a Frydenberg loss would mean for the Liberals<figure><img src="https://images.theconversation.com/files/460942/original/file-20220503-14-bvakm5.png?ixlib=rb-1.1.0&rect=0%2C5%2C3994%2C1988&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption"></span> </figcaption></figure><p>As well as her interviews with politicians and experts, Politics with Michelle Grattan includes “Word from The Hill”, where she discusses the news with members of The Conversation politics team.</p>
<p>In this podcast Michelle and politics + society editor Amanda Dunn canvass the Reserve Bank’s increase in interest rates, and which side wins or loses from it, as cost of living is centre stage in the election battle. They also discuss Anthony Albanese’s launch, and the implications for the Liberals if Josh Frydenberg were to lose in Kooyong.</p><img src="https://counter.theconversation.com/content/182339/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>Michelle Grattan discusses politics with politics + society editor, Amanda DunnMichelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1820582022-04-29T02:26:45Z2022-04-29T02:26:45ZClive Palmer’s promise to cap mortgage rates at 3% would make it much harder to get a home loan<figure><img src="https://images.theconversation.com/files/460476/original/file-20220429-25458-nh3jb8.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C4031%2C3024&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">The Conversation</span></span></figcaption></figure><p>Clive Palmer’s United Australia Party continues to make waves in the federal election campaign, most recently with advertisements on massive billboards pledging a “maximum 3% interest rate on all home loans for five years”. But does this promise stack up? </p>
<p>Keeping mortgage rates at their record lows for five years is a bold promise. Especially because – as Clive Palmer well knows – the government doesn’t set interest rates. </p>
<p>The key driver is the Reserve Bank of Australia, which sets the cash rate to keep inflation at a low and stable level of 2-3%. But once the cash rate is set, every other bank is entitled to lend money out at whatever competitive rate they want. They frequently diverge from the cash rate based on their cost of obtaining funding from Australian savers and from overseas.</p>
<p>On its <a href="https://www.unitedaustraliaparty.org.au/united-australia-party-outlines-economic-plan-for-freedom-and-prosperity/">website</a>, the United Australia Party (UAP) says it would “use the power of the Constitution to put a cap on the bank home lending rate at a maximum of 3% for the next five years.” (It also promises to introduce a 15% export licence for all iron ore exports from Australia, and “pledge the proceeds from such licences to be used for the retirement of the one trillion-dollar debt mountain that Australia faces”.)</p>
<p>For a moment, let’s run with this 3% idea from the UAP. Imagine for a minute it held the balance of power or even had a majority in both houses of parliament.</p>
<p>If UAP really did intend to try and deliver on an election promise to cap interest rates at 3% for five years, what would the flow-on effects be?</p>
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<a href="https://theconversation.com/5-interview-questions-for-the-next-rba-deputy-governor-179369">5 interview questions for the next RBA deputy governor</a>
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<h2>Mortgages just for the wealthiest</h2>
<p>The government did control interest rates for many years, until deregulation in the Hawke years. Government control of interest rates and the banking sector made home loans very hard to get, forcing Australians to set up inefficient building societies and credit unions to skirt around the regulations.</p>
<p>But, say the UAP passed a law saying you can’t lift interest rates above 3% – no matter what. You will soon run into problems.</p>
<p>The first is that if banks can’t make a profit on mortgages – if, for example, it costs 4% to borrow and they can only charge 3% – then lending doesn’t make financial sense for them. The banks will just stop writing mortgages entirely.</p>
<p>Even if they can squeak a small profit margin they may only write mortgages for the wealthiest and safest Australians to lend to. Wealthy households are less likely to default and thus are cheaper for banks to lend to.</p>
<p>In other words, a 3% cap on interest rates would lead to a situation where either banks stop mortgages entirely or greatly restrict them. A lot of would-be home owners will not be able to get a mortgage at all. </p>
<p>And if you can’t get a mortgage at all, then for most of us it doesn’t matter what the rate is because you can’t buy a house in the first place. If lending dried up, the number of house buyers would plummet, which would devalue homes. </p>
<p>The only thing worse than a banking system that is expensive is one that is in crisis and potentially getting bailed out or going bankrupt, which might very well imperil the financial stability of the banking sector and derail the economy.</p>
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<h2>OK, how else could they ensure a 3% interest rate for people?</h2>
<p>Apart from changing the law, another way to deliver on this commitment is by hugely increasing government spending. </p>
<p>Perhaps the government could pay home owners the difference between whatever their interest rate is and the promised 3%. So, say your interest rate was 4%. That’s 1% more than the promised 3%, so the government could pay that 1% difference for you, using taxpayer money.</p>
<p>Of course, that would be incredibly costly. Australia’s household debt is almost twice its income. Paying even a small share of the interest payments would be an enormous burden on the budget.</p>
<p>It would be, in effect, a subsidy for all mortgage owners; a hugely expensive giveaway to the richest people in Australia.</p>
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Read more:
<a href="https://theconversation.com/few-restrictions-no-spending-limit-and-almost-no-oversight-welcome-to-political-advertising-in-australia-181248">Few restrictions, no spending limit, and almost no oversight: welcome to political advertising in Australia</a>
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<h2>Alright then, what if we just changed the RBA’s job description?</h2>
<p>There is a third way you could cap interest rates at 3% and that is to rewrite the RBA’s mandate and ban them from lifting the cash rate for five years.</p>
<p>But the reason the RBA pushes up interest rates is to help control inflation and the cost of living. That’s why there’s <a href="https://theconversation.com/inflation-hits-an-extraordinary-5-1-how-long-until-mortgage-rates-climb-181832">talk of an interest rate rise</a> after inflation hit a whopping 5.1% this week.</p>
<p>Banning the RBA from pushing up rates comes with real inflationary risks. That would overheat the economy and drive up inflation. You’d see hugely higher prices at the supermarket and the fuel pump.</p>
<p>Perhaps you think homeowners are more deserving than renters or pensioners or anyone in the economy who doesn’t have a mortgage. But I don’t.</p>
<h2>No free lunch</h2>
<p>In a recent podcast <a href="https://theconversation.com/politics-with-michelle-grattan-andrew-wilkie-invites-independent-candidates-to-call-him-for-a-chat-about-approaching-a-hung-parliament-181604">interview</a> with Michelle Grattan, independent MP Andrew Wilkie mentioned this UAP ad, saying:</p>
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<p>In my opinion, this is the worst campaign I’ve observed, as far as the mud slinging and the dishonesty. There used to be some limits on the dishonesty of the political parties and the candidates but there seem to be no limits this election. There’s a billboard down the road from Clive Palmer’s United Australia Party, promising a 3% maximum mortgage rate. I mean, they know that’s just nonsense.</p>
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<p>Whatever your view, it’s worth remembering there is no such thing as a free lunch in the economy. If you want to make something cheaper, you have to pay for it some other way.</p>
<p>You either have to pay for it from taxpayers’ money or you make the banks pay, which comes with a real risk of financial crisis.</p>
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Read more:
<a href="https://theconversation.com/game-of-loans-australias-reserve-bank-loses-its-heir-apparent-178994">Game of Loans: Australia's Reserve Bank loses its heir apparent</a>
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<img src="https://counter.theconversation.com/content/182058/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>From 2011 to 2013 Isaac Gross worked as an economist for the Reserve Bank of Australia.
</span></em></p>The government used to set interest rates but it doesn’t anymore. If UAP really did try to deliver on an election promise to cap interest rates at 3% for five years, what would the consequences be?Isaac Gross, Lecturer in Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1821662022-04-28T12:18:05Z2022-04-28T12:18:05ZGrattan on Friday: Managing post-COVID a delicate balance for Anthony Albanese<p>Philip Lowe mightn’t be a household name but the Reserve Bank governor finds himself catapulted right into the centre of this election campaign, in which events are proving more important than policies. </p>
<p>The very large inflation spike has economists declaring vehemently that the bank should put interest rates up on Tuesday, rather than waiting until June, after the election. </p>
<p>Both sides of politics accept the necessity and inevitability of rates rising soon. Lowe and the bank are independent and non-political, but they would also be aware a decision to hold off the increase for another month could be seen as political. </p>
<p>If rates do go up on Tuesday, what impact will that have on the election?</p>
<p>No-one can be sure. Like a number of issues in this election – notably the Solomons-China security pact and climate change – cost of living, including higher interest rates, would cut both ways. </p>
<p>Some voters, under increasing financial pressure, would take out their frustration on the government. </p>
<p>But there is a Labor fear that if rates go up next week, that could present an opportunity for Scott Morrison. The government could use it to exploit the “uncertainty” theme at the core of its campaign, reinforcing the message that change would be a leap into the unknown in scary times.</p>
<p>The Coalition would be helped in prosecuting its case by the fact rates have been rising internationally, so blame can’t credibly be sheeted locally. Second, Anthony Albanese’s rating with voters on economic management is very low. In this week’s Australian Financial Review Ipsos poll, 48% picked Morrison as “having a firm grasp on economic policy” while only 31% said that of Albanese.</p>
<p>Focus group research backs the point about Labor’s potential vulnerability. Simon Welsh, from the (Labor-leaning) firm of RedBridge, says that for some time a group of voters has been “pivoting” away from issues of Morrison’s character and leadership towards economic issues and cost of living. This “pivot” started around the time petrol prices escalated, and has continued since. </p>
<p>“If there is a rate rise next week it will add more fuel onto economic concerns,” Welsh says. “People don’t have confidence that there is a plan from Labor on the economy and interest rates. Their confidence in the Liberals is based on a ‘generic brand’ of them as better money managers.” </p>
<p>Even if the Reserve Bank stayed its hand next week, the shadow of the certain later rise would hang over the rest of the campaign. </p>
<p>With the six-week march to May 21 at the halfway mark, the next week will be crucial for Albanese, as he returns from COVID isolation to the trail.</p>
<p>This is a really risky time for him. Labor has mainly managed the absence
(aside from some virtual interviews) of its leader as well as it could. Apart from deputy leader Richard Marles struggling to explain past statements on China, opposition frontbenchers have held up their end. </p>
<p>Shadow treasurer Jim Chalmers appeared on top of his portfolio; finance (and campaign) spokeswoman Katy Gallagher looked very solid, shadow foreign minister Penny Wong sounded authoritative. Campaign spokesman Jason Clare has become a bit of a star. </p>
<p>There have been questions as to why Tanya Plibersek isn’t doing more, and talk of her (and some others) being “frozen out”. Albanese and Plibersek (both from the left) are not close, but both camps play down the suggestion she’s not busy. In 2019 she was more prominent, but she was deputy leader and her education portfolio more central in Labor’s pitch. </p>
<p>While it was better for Albanese, if he was going to get COVID, to contract it early, he’s now returning at a very challenging time, with Labor’s formal “launch” in Perth on Sunday. Not only will his performance be minutely scrutinised, but there’s a lot of travel involved. </p>
<p>Albanese said on Thursday: “It’s been a difficult week […] My doctor tells me I have to take things easy, particularly in the first few days to not do the 16 and 20-hour days that I was doing.” (He shouldn’t have been doing 20-hour days anyway, but that’s another story.) </p>
<p>Morrison won’t hesitate to exploit any sign Albanese has been slowed by COVID. He noted pointedly on Thursday, “He’s had a pretty quiet week. I remember when I was in iso, I had a very busy week attending QUAD summits and doing all those sorts of things.” </p>
<p>The PM was also pressing to have the remaining debates quickly. “It’s time to make up for some lost time. I’m happy to do two debates next week. Seven and Nine have both offered me two debates next week.” (Labor has its own ideas.) </p>
<p>Albanese still has a great deal of work to do if he’s to convince undecided voters he is a reliable alternative. At the same time, he has to ensure his campaign is paced to match how well he is feeling. It could be a difficult balance. </p>
<p>A feature of this election is that it has multiple fronts. Apart from the national campaign, there are regional battles, the individual seat contests, and almost a separate election revolving around the “teals”. This latter has become a defining feature of election-2022. </p>
<p>Teals start facing steep mountain. They need to reach at least second position on primaries to have a potential win, which means reducing the vote of their Liberal opponent to under 45% and polling about 30% themselves. The lower the Liberal vote and the higher their own, the better the chance.</p>
<p>Sources with an overview of their campaigns suggest several teals are in this position or on the cusp. The question is whether they will hold their ground or see their support slip in the final weeks, as “soft Liberal” and undecided voters firm up their thinking.</p>
<p>Although we don’t know how the teal story will end, we do know that it is frightening the hell out of the Liberals in the firing line. </p>
<p>Nowhere is the ground war more intense and, on the Liberal side, desperate, than in Treasurer Josh Frydenberg’s electorate of Kooyong, where money and signage apparently have no limits for incumbent or challenger, because the stakes are huge. The loss of the seat once held by Robert Menzies would have immense practical and symbolic implications for the Liberal party.</p><img src="https://counter.theconversation.com/content/182166/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>Philip Lowe mightn’t be a household name but the Reserve Bank governor finds himself catapulted right into the centre of this election campaign, in which events are proving more important than policies.Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.