tag:theconversation.com,2011:/us/topics/rba-3749/articlesRBA – The Conversation2024-02-04T01:02:06Ztag:theconversation.com,2011:article/2189272024-02-04T01:02:06Z2024-02-04T01:02:06ZMortgage and inflation pain to ease, but only slowly: how 31 top economists see 2024<figure><img src="https://images.theconversation.com/files/572630/original/file-20240201-21-xh5xpo.png?ixlib=rb-1.1.0&rect=45%2C86%2C1871%2C870&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
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<p>The <a href="https://theconversation.com/au/topics/conversation-economic-survey-81354">panel</a> draws on the expertise of leading forecasters at 28 Australian universities, think tanks and financial institutions – among them economic modellers, former Treasury, International Monetary Fund and Reserve Bank officials, and a former member of the Reserve Bank board.</p>
<p>Its forecasts paint a picture of weak economic growth, stagnant consumer spending, and a continuing per-capita recession.</p>
<p>The average forecast is for the Reserve Bank to delay cutting its cash rate, keeping it near its present 4.35% until at least the middle of the year, and then cutting it to <a href="https://cdn.theconversation.com/static_files/files/3028/The_Conversation_AU_February_2024_Economic_Survey.pdf">4.2%</a> by December 2024, 3.6% by December 2025 and 3.4% by December 2026.</p>
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<p>The gentle descent would deliver only three interest rate cuts by the end of next year, cutting $274 from the monthly cost of servicing a $600,000 mortgage and leaving the cost around $1,100 higher than it was before rates began climbing.</p>
<p>Six of the experts surveyed expect the Reserve Bank to increase rates further in the first half of the year, while 20 expect no change and three expect a cut.</p>
<p>Former head of the NSW treasury Percy Allan said while the Reserve Bank would push up rates in the first half of the year to make sure inflation comes down, it would be forced to relent in the second half of the year as unemployment grows and the economy heads towards recession.</p>
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Read more:
<a href="https://theconversation.com/the-7-new-graphs-that-show-inflation-falling-back-to-earth-220670">The 7 new graphs that show inflation falling back to earth</a>
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<p>Warwick McKibbin, a former member of the Reserve Bank board, said the board would push up rates twice more in the first half of the year as insurance against inflation before leaving them on hold.</p>
<p>Former Reserve Bank of Australia chief economist Luci Ellis, who is now chief economist at Westpac, expects the first cut no sooner than September, believing the board will wait to see clear evidence of further falls in inflation and economic weakening before it moves.</p>
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<h2>Inflation to keep falling, but more gradually</h2>
<p>Today’s <a href="https://www.rba.gov.au/">Reserve Bank board meeting</a> will consider an inflation rate that has come down <a href="https://theconversation.com/the-7-new-graphs-that-show-inflation-falling-back-to-earth-220670">faster than it expected</a>, diving from 7.8% to 4.1% in the space of a year.</p>
<p>The newer more experimental monthly measure of inflation was just <a href="https://theconversation.com/the-7-new-graphs-that-show-inflation-falling-back-to-earth-220670">3.4%</a> in the year to December, only points away from the Reserve Bank’s target of 2–3%.</p>
<p>But the panel expects the descent to slow from here on, with the standard measure taking the rest of the year to fall from 4.1% to 3.5% and not getting below 3% until <a href="https://cdn.theconversation.com/static_files/files/3027/The_Conversation_AU_2024_economic_survey.pdf">late 2025</a>.</p>
<p>Economists Chris Richardson and Saul Eslake say while inflation will keep heading down, the decline might be slowed by supply chain pressures from the conflict in the Middle East and the boost to incomes from the <a href="https://theconversation.com/albanese-tax-plan-will-give-average-earner-1500-tax-cut-more-than-double-morrisons-stage-3-221875">tax cuts</a> due in July.</p>
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<h2>Slower wage growth, higher unemployment</h2>
<p>While the panel expects wages to grow faster than the consumer price index, it expects wages growth to slip from around <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/wage-price-index-australia/latest-release">4%</a> in 2023 to 3.8% in 2024 and 3.4% in 2025 as higher unemployment blunts workers’ bargaining power.</p>
<p>But the panel doesn’t expect much of an increase in unemployment. It expects the unemployment rate to climb from its present <a href="https://www.datawrapper.de/_/w9h9f/">3.9%</a> (which is almost a long-term low) to 4.3% throughout 2024, and then to stay at about that level through 2025.</p>
<p>All but two of the panel expect the unemployment rate to remain below the range of 5–6% that was typical in the decade before COVID.</p>
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Read more:
<a href="https://theconversation.com/we-can-and-should-keep-unemployment-below-4-say-top-economists-211277">We can and should keep unemployment below 4%, say top economists</a>
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<p>Economic modeller Janine Dixon said the “new normal” between 4% and 5% was likely to become permanent as workers embraced flexible arrangements that allow them to stay in jobs in a way they couldn’t before.</p>
<p>Cassandra Winzar, chief economist at the Committee for the Economic Development of Australia, said the government’s commitment to full employment was one of the things likely to keep unemployment low, along with Australia’s demographic transition as older workers leave the workforce.</p>
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<h2>Slower economic growth, per-capita recession</h2>
<p>The panel expects very low economic growth of just 1.7% in 2024, climbing to 2.3% in 2025. Both are well below the 2.75% the treasury believes the economy is <a href="https://treasury.gov.au/speech/the-economic-and-fiscal-context-and-the-role-of-longitudinal-data-in-policy-advice">capable of</a>.</p>
<p>All but one of the forecasts are for economic growth below the present population growth rate of 2.4%, suggesting that the panel expects population growth to exceed economic growth for the second year running, extending Australia’s so-called <a href="https://theconversation.com/were-in-a-per-capita-recession-as-chalmers-says-gdp-steady-in-the-face-of-pressure-212642">per capita recession</a>.</p>
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<p>The lacklustre forecasts raise the possibility of what is commonly defined as a “technical recession”, which is two consecutive quarters of negative economic somewhere within a year of mediocre growth.</p>
<p>Taken together, the forecasters assign a 20% probability to such a recession in the next two years, which is lower than in <a href="https://theconversation.com/two-more-rba-rate-hikes-tumbling-inflation-and-a-high-chance-of-recession-how-our-forecasting-panel-sees-2023-24-208477">previous surveys</a>.</p>
<p>But some of the individual estimates are high. Percy Allen and Stephen Anthony assign a 75% and 70% chance to such a recession, and Warren Hogan a 50% chance.</p>
<p>Hogan said when the economic growth figures for the present quarter get released, they are likely to show Australia is in such a recession at the moment. </p>
<p>The economy barely grew at all in the September quarter, expanding just <a href="https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-national-income-expenditure-and-product/latest-release">0.2%</a> and was likely to have shrunk in the December quarter and to shrink further in this quarter.</p>
<p>The panel expects the US economy to grow by 2.1% in the year ahead in line with the <a href="https://www.imf.org/en/Publications/WEO/Issues/2024/01/30/world-economic-outlook-update-january-2024">International Monetary Fund</a> forecast, and China’s economy to grow 5.4%, which is lower than the International Monetary Fund’s forecast.</p>
<h2>Weaker spending, weak investment</h2>
<p>The panel expects weak real household spending growth of just 1.2% in 2014, supported by an ultra-low household saving ratio of close to zero, down from a recent peak of 19% in September 2021.</p>
<p>Mala Raghavan of The University of Tasmania said previous gains in income, rising asset prices and accumulated savings were being overwhelmed by high inflation and rising interest rates. </p>
<p>Luci Ellis expected the squeeze to continue until tax and interest rate cuts in the second half of the year, accompanied by declining inflation.</p>
<p>The panel expects non-mining investment to grow by only 5.1% in the year ahead, down from 15%, and mining investment to grow by 10.2%, down from 22%.</p>
<p>Johnathan McMenamin from Barrenjoey said private and public investment had been responsible for the lion’s share of economic growth over the past year and was set to plateau and fade as a driver of growth.</p>
<h2>Home prices to climb, but more slowly</h2>
<p>The panel expects home price growth of 4.6% in Sydney during 2024 (down from 11.4% in 2024) and 3.1% in Melbourne, down from 3.9% in 2024.</p>
<p>ANZ economist Adam Boyton said decade-low building approvals and very strong population growth should keep demand for housing high, outweighing a drag on prices from high interest rates. While high interest rates have been restraining demand, they are likely to ease later in the year.</p>
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<p>In other forecasts, the panel expects the Australian dollar to stay below US$0.70, closing the year at US$0.69, it expects the ASX 200 share market index to climb just 3% in 2024 after climbing 7.8% in 2023, and it expects a small budget surplus of A$3.8 billion in 2023-24, followed by a deficit of A$13 billion in 2024-25.</p>
<p>The budget surplus should be supported by a forecast iron ore price of US$114 per tonne in December 2024, down from the present US$130, but well up on the <a href="https://budget.gov.au/content/myefo/index.htm">US$105</a> assumed in the government’s December budget update.</p>
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<h2>The Conversation’s Economic Panel</h2>
<p><em>Click on economist to see full profile.</em></p>
<p><iframe id="tc-infographic-1014" class="tc-infographic" height="400px" src="https://cdn.theconversation.com/infographics/1014/ed3b94caed943dd75aa383a014aca7a10b13bf10/site/index.html" width="100%" style="border: none" frameborder="0"></iframe></p>
<p><strong>Download the answers as <a href="https://cdn.theconversation.com/static_files/files/3030/The_Conversation_AU_Feb_2024_economic_survey.xlsx?1707030546">XLS</a> <a href="https://cdn.theconversation.com/static_files/files/3028/The_Conversation_AU_February_2024_Economic_Survey.pdf">PDF</a></strong></p><img src="https://counter.theconversation.com/content/218927/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin is economics editor of The Conversation AU.</span></em></p>The Conversation’s expert 00panel expects inflation to continue to fall, but more gradually, and it expects the RBA to be slow in responding. Unemployment should climb and economic growth weaken.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2191972023-12-05T05:39:56Z2023-12-05T05:39:56ZWill the RBA raise rates again? Unless prices surge over summer, it’s looking less likely<figure><img src="https://images.theconversation.com/files/563558/original/file-20231205-17-zf09ff.png?ixlib=rb-1.1.0&rect=1736%2C1137%2C2191%2C1275&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/brisbane-queensland-australia-mar-14-2022-2135239757">Shutterstock</a></span></figcaption></figure><p>If you’re looking for clues about whether the Reserve Bank has any interest rate rises left, Governor Michele Bullock offered several in her <a href="https://www.rba.gov.au/media-releases/2023/mr-23-35.html">statement</a> after Tuesday’s board meeting, saying:</p>
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<li><p>the latest monthly figures showed inflation “continuing to moderate”</p></li>
<li><p>inflation expectations remained “consistent with the inflation target” </p></li>
<li><p>wages growth was “not expected to increase much further”.</p></li>
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<p>The statement reads not only as an account of why the board kept rates on hold this month – as expected, after <a href="https://theconversation.com/why-its-a-good-bet-the-melbourne-cup-day-rate-hike-will-be-the-last-217094">increasing them in November</a> – but also an account of why it might not need to lift rates again.</p>
<p>Much will depend on “data and the evolving assessment of risks”. The board will make that assessment at its first meeting for the year in February.</p>
<p>Here’s why that next meeting matters so much. </p>
<h2>Inflation’s headed in the right direction</h2>
<p>The monthly measure of annual inflation has been falling since it peaked in December. Last week we learned that in October it fell from 5.6% to <a href="https://theconversation.com/australias-inflation-rate-now-starts-with-a-4-allowing-the-rba-to-hold-fire-on-rates-218806">4.9%</a>, meaning it’s now closer to the Reserve Bank’s target of 2-3% than to the December peak of 8.4%.</p>
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<p>A few special government measures helped push it down.</p>
<p>An increase in Commonwealth <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/monthly-consumer-price-index-indicator/latest-release">rent assistance</a> decreased recorded rents; energy bill <a href="https://www.energy.gov.au/energy-bill-relief-fund/energy-bill-relief-fund-households">rebates</a> decreased recorded electricity prices; and changes to the childcare <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release">subsidy</a> decreased recorded childcare prices.</p>
<p>Those government measures won’t depress future inflation readings, suggesting that from here on inflation might bounce back.</p>
<p>But on the other hand, from here on the very large inflation outcomes recorded at the end of last year will drop out of the 12-monthly figures.</p>
<h2>The mathematics of falling inflation</h2>
<p>Simple maths suggests that if this year’s November and December readings are like the average of the other readings this year, annual inflation will fall to 3.1%.</p>
<p>The November figure will be released on January 10 and the December figure on January 31. Both will be available to the Reserve Bank board when it meets on February 5 and 6, along with the latest quarterly measure of inflation. </p>
<p>If that quarterly measure is the same as the average of the past two quarters, it will show annual inflation of 4%.</p>
<p>Such outcomes – which are likely if inflation continues along its present trajectory – would see inflation closing in on the Reserve Bank’s target band and relieve it of any need to further lift rates.</p>
<p>Of course, it mightn’t happen. But there’s a lot driving down inflation. </p>
<h2>Prices we don’t much notice are falling</h2>
<p>The prices we pay attention to are those we see in the supermarket, what we fork out on mortgage payments and household bills, and what we pay at the petrol pump. (Petrol prices have been <a href="https://informedsources.com/petrol-prices-chart/">falling for weeks now</a>.)</p>
<p>Prices we notice less are far less troubling than they were. </p>
<p>During 2022, the price of household appliances climbed <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release">8.2%</a>. So far this year it has <em><a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release">fallen</a></em> 2%. </p>
<p>The price of furnishings climbed 5.3% during 2022. So far this year it has fallen 1.6%. The price of clothing climbed 5.4%. So far this year it has fallen 2.6%.</p>
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<p>All sorts of prices are coming down, partly because the supply bottlenecks driving them up last year are being reversed and partly because – thanks to 13 near consecutive interest rate rises – we are not buying at anything like the rate we used to.</p>
<p>Retail spending grew by just <a href="https://www.abs.gov.au/statistics/industry/retail-and-wholesale-trade/retail-trade-australia/latest-release">1.2%</a> over the year to October – the least since the COVID lockdowns. </p>
<p>Likely population growth of 2.4% and what Westpac believes to be retail price growth of <a href="https://www.westpaciq.com.au/economics/2023/11/aus-retail-sales-dip">3.6%</a> means the amount bought per person actually fell <a href="https://www.westpaciq.com.au/economics/2023/11/aus-retail-sales-dip">4.5%</a>. </p>
<p>Even this year’s more hyped <a href="https://theconversation.com/really-need-those-new-shoes-why-you-might-spend-up-big-at-the-black-friday-sales-218241">Black Friday</a> spending was up only <a href="https://cdn.theconversation.com/static_files/files/2960/Westpac-card-tracker-20231201.indd.pdf">0.6%</a> to <a href="https://cdn.theconversation.com/static_files/files/2961/ANZ_observed_Australian_Spending_Black_Friday_spending_splash.pdf">1%</a> compared to Black Friday in November last year. Given our population growth was higher than that, it suggests we spent less on those sales per person this year.</p>
<h2>Dentistry and haircuts are more expensive</h2>
<p>What about the prices that are climbing strongly?</p>
<p>With the exception of rents – up 7.6% over the year – it’s hard to find many.</p>
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<a href="https://images.theconversation.com/files/563542/original/file-20231205-30-epc2lu.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/563542/original/file-20231205-30-epc2lu.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/563542/original/file-20231205-30-epc2lu.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=965&fit=crop&dpr=1 600w, https://images.theconversation.com/files/563542/original/file-20231205-30-epc2lu.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=965&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/563542/original/file-20231205-30-epc2lu.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=965&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/563542/original/file-20231205-30-epc2lu.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1212&fit=crop&dpr=1 754w, https://images.theconversation.com/files/563542/original/file-20231205-30-epc2lu.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1212&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/563542/original/file-20231205-30-epc2lu.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1212&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">Dentistry is becoming more expensive.</span>
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<p>In a speech after the last Reserve Bank board meeting, Governor Bullock said inflation was increasingly being driven by the price of <a href="https://www.rba.gov.au/speeches/2023/sp-gov-2023-11-22.html">services</a>, which stands to reason given inflation in the price of goods has been ebbing away.</p>
<p>She nominated increases in the prices charged by hairdressers and dentists, as well as restaurants. And there’s definitely something to see there, for <a href="https://www.rba.gov.au/speeches/2023/sp-gov-2023-11-22.html">dentists</a>.</p>
<p>During 2022, the statistician’s measure of the price of dentistry climbed 3.9%. </p>
<p>In the first three quarters of this year, it climbed by that much again, meaning the pace picked up. But the increase is not that much more than the overall increase in wages, suggesting dentistry is not being priced much further out of reach.</p>
<p>Haircuts climbed in price a hefty 6% during 2022 and continued to climb at that pace during the first three quarters of 2023, which is uncomfortable, but at least not accelerating. </p>
<p>The price of restaurant meals climbed 6.7% during 2022 but only 3.8% in the first three quarters of 2023, meaning the pace is easing.</p>
<h2>Wage growth a risk, but not yet a worry</h2>
<p>The governor is concerned high wage growth will become embedded in the price of services. But at 3.9%, wage growth isn’t particularly high.</p>
<p>About a third of workers are covered by enterprise agreements. Jeff Borland of the University of Melbourne points out the increases in most of the newly-lodged enterprise agreements are flat or trending down. Many of us got a top-up at the start of our three-year agreements, which won’t be continued.</p>
<p>Borland’s <a href="https://cdn.theconversation.com/static_files/files/2962/lmsnov23.pdf">statistical analysis</a> suggests individual agreements aren’t pushing up wage growth either, but increases granted by the Fair Work Commission to the 20% of workers on awards are. Yet, by design, these increases reflect, rather than drive, inflation.</p>
<p>If inflation does accelerate over the holiday season, the Reserve Bank probably will push up rates further. But as the governor seemed to acknowledge on Tuesday, it’s not looking likely.</p>
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Read more:
<a href="https://theconversation.com/inflation-now-starts-with-a-4-allowing-the-rba-to-hold-fire-on-rates-218806">Inflation now starts with a 4, allowing the RBA to hold fire on rates</a>
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<img src="https://counter.theconversation.com/content/219197/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin is Economics Editor of The Conversation. </span></em></p>Per person, we’re spending less this year – even on this year’s much hyped Black Friday sales. If that continues over summer and inflation stays low, a rate hike in February 2024 looks unlikely.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2175482023-12-03T19:16:56Z2023-12-03T19:16:56ZHappy birthday AUD: how our Australian dollar was floated, 40 years ago this week<p>These days, we take for granted that the value of the Australian dollar fluctuates against other currencies, changing thousands of times a day and at times jumping or falling quite a lot in the space of a week.</p>
<p>But for most of Australia’s history, the value of the Australian dollar – and the earlier Australian pound – was “<a href="https://www.rba.gov.au/education/resources/explainers/exchange-rates-and-their-measurement.html#:%7E:text=exchange%20rate%20volatility.-,Pegged,or%20a%20basket%20of%20currencies.">pegged</a>” to either gold, pound sterling, the US dollar or to a value of a basket of currencies.</p>
<p>The momentous decision to <a href="https://www.afr.com/policy/economy/the-long-road-that-led-to-the-floating-of-the-australian-dollar-20141121-11ra30">float</a> the dollar was taken on Friday December 9 1983 by the Hawke Labor Government, which was elected nine months earlier. </p>
<p>As they approached the cabinet room at what is now Old Parliament House, Treasurer Paul Keating asked Reserve Bank Governor Bob Johnston to write him a letter to say the bank recommended floating. </p>
<p>The letter, dated <a href="https://cdn.theconversation.com/static_files/files/2955/Memo_to_Treasurer.pdf">December 9</a>, referred to the bank’s concern about the</p>
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<p>volume of foreign exchange purchases and its belief that if these flows are to be brought under control we shall need to face up without delay either to less Reserve Bank participation in the exchange market or capital controls </p>
</blockquote>
<p>By “less Reserve Bank participation”, Johnston meant a managed float; direct controls were to be considered “as a last resort”.</p>
<p>The bank had long maintained a “<a href="https://www.afr.com/policy/economy/the-long-road-that-led-to-the-floating-of-the-australian-dollar-20141121-11ra30">war book</a>”, bearing the intriguing label “Secret Matter”, outlining the procedures to be followed in the event of a decision to float.</p>
<p>An updated version was delivered to the treasurer the day before the decision.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/563248/original/file-20231204-19-obttqx.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/563248/original/file-20231204-19-obttqx.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=316&fit=crop&dpr=1 600w, https://images.theconversation.com/files/563248/original/file-20231204-19-obttqx.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=316&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/563248/original/file-20231204-19-obttqx.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=316&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/563248/original/file-20231204-19-obttqx.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=397&fit=crop&dpr=1 754w, https://images.theconversation.com/files/563248/original/file-20231204-19-obttqx.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=397&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/563248/original/file-20231204-19-obttqx.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=397&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Memo to Treasurer.</span>
<span class="attribution"><a class="source" href="https://unreserved.rba.gov.au/nodes/view/88861">RBA Unreserved</a></span>
</figcaption>
</figure>
<p>The <a href="https://www.brookings.edu/articles/floating-exchange-rates-after-ten-years/">US</a> and the <a href="http://news.bbc.co.uk/onthisday/hi/dates/stories/june/23/newsid_2518000/2518927.stm">UK</a> floated their currencies in the early 1970s. Since the early 1980s the value of the dollar had been set via a “<a href="https://www.rba.gov.au/publications/bulletin/2018/dec/understanding-exchange-rates-and-why-they-are-important.html">crawling peg</a>” – meaning its value was pegged to other currencies each week, and later each day, by a committee of officials who announced the values at <a href="https://www.smh.com.au/entertainment/inside-the-floating-of-the-a-20131211-2z698.html">9.30 each morning</a>.</p>
<p>If too much or too little money came into the country as a result of the rate the authorities had set, they adjusted it the next day, sometimes losing money to speculators who had bet they wouldn’t be able to hold the rate they had set.</p>
<h2>Speculators to speculate against themselves</h2>
<p>Keating had Johnston accompany him to the December 9 press conference instead of Treasury Secretary John Stone, who had argued against the float in the cabinet room, putting the case for direct controls on capital inflows instead.</p>
<p>Johnston’s presence was meant to make clear that at least the central bank supported floating the dollar.</p>
<p>Keating told the press conference the float meant the speculators would be <a href="https://www.smh.com.au/business/banking-and-finance/from-the-archives-1983-the-australian-dollar-floats-free-20191206-p53hjq.html">speculating against themselves</a>“, rather than against the authorities.</p>
<p>One banker quoted that night confessed to being ”<a href="https://www.smh.com.au/business/banking-and-finance/from-the-archives-1983-the-australian-dollar-floats-free-20191206-p53hjq.html">absolutely staggered</a>“. "I’m not sure they know what they have done,” the banker said.</p>
<p>The following Monday on ABC’s AM program, presenter <a href="https://www.abc.net.au/news/2003-12-08/20-years-since-dollar-floated/102568">Red Harrison</a> heralded “a brave new world for the Australian dollar”. He said</p>
<blockquote>
<p>from today the dollar must take its chance, subject to the supply and demand of the international marketplace, and there are suggestions that foreign exchange dealers expect a nervous start to trading when the first quotes are posted this morning.</p>
</blockquote>
<p>At the time, the Australian dollar was worth 90 US cents. At first it <a href="https://www.rba.gov.au/speeches/2013/sp-gov-211113.html">rose</a>, before settling back. </p>
<p>Since then, the Australian dollar has fluctuated from a low of <a href="https://www.nma.gov.au/defining-moments/resources/australian-dollar-floated">47.75</a> US cents in April 2001 to a high of US$1.10 in July 2011.</p>
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<h2>The long road to the float</h2>
<p>The idea first took hold in Australia when Commonwealth Bank Governor <a href="https://www.rba.gov.au/publications/bulletin/2022/dec/hc-coombs-governor-of-australias-central-bank-1949-1968.html">“Nugget” Coombs</a> visited Canada in 1953, at a time when it was one of the few countries with a floating exchange rate. </p>
<p>On his return, Coombs wrote the bank should consider Canada’s experience.</p>
<p>A strong advocate from the mid-1960s was the bank’s economist <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1475-4932.1986.tb00915.x">Austin Holmes</a>. Among those he mentored at what by then was called the Reserve Bank were Bob Johnston, Don Sanders and John Phillips.</p>
<p>All three were in the cabinet room when the decision was taken. </p>
<h2>Backed by Cairns, opposed by Abbott</h2>
<p>An unlikely advocate in the 1970s was the left-wing Labor treasurer <a href="https://treasury.gov.au/sites/default/files/2019-03/05Hawkins.pdf">Jim Cairns</a>.</p>
<p>But asked in 1979 whether he was in favour of a float, the then Reserve Bank governor <a href="https://www.rba.gov.au/about-rba/history/governors/sir-harold-murray-knight.html">Harry Knight</a> responded by quoting Saint Augustine, saying “God make me pure, but not yet”. An oil shock was making markets turbulent at the time.</p>
<p>In 1981, the Campbell inquiry into the Australian financial system delivered a landmark report to Treasurer John Howard, <a href="https://treasury.gov.au/publication/p1981-afs">recommending</a> a float. The idea was backed by neither the Treasury nor Prime Minister Malcolm Fraser.</p>
<p>Two years later, Howard watched from opposition as <a href="https://cdn.theconversation.com/static_files/files/2956/Statement_by_Treasurer.pdf">Labor did what he could not</a>.</p>
<p>The Liberal Party generally backed Labor’s move, with one notable exception – the later prime minister, <a href="https://www.smh.com.au/national/tony-abbott-wrote-20-years-ago-floating-dollar-didnt-make-sense-20131206-2ywpm.html">Tony Abbott</a>, who in 1994 wrote that </p>
<blockquote>
<p>changing the price of the dollar moment by moment in response to each transaction makes no more sense than altering the price of cornflakes every time a buyer takes a packet off the supermarket shelves </p>
</blockquote>
<h2>A success by any measure</h2>
<p>The floating exchange rate has served Australia well. </p>
<p>When the Australian economy has slowed or contracted – in the early 1990s, the Asian financial crisis, the global financial crisis and in the COVID recession – the Australian dollar has fallen, making Australian exports cheaper in foreign markets.</p>
<p>When mining booms have sucked money into the country, the Australian dollar has climbed, spreading the benefit and fighting inflation by increasing the buying power of Australian dollars.</p>
<p>It’s why these days, hardly anyone wants to return to a <a href="https://www.rba.gov.au/education/resources/explainers/exchange-rates-and-their-measurement.html">pegged</a> rate.</p><img src="https://counter.theconversation.com/content/217548/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Selwyn Cornish is the Official Historian, Reserve Bank of Australia.</span></em></p><p class="fine-print"><em><span>John Hawkins was formerly a senior economist with the Reserve Bank and the Australian Treasury.</span></em></p>Up until December 9 1983, officials used to announce each morning how much the dollar was worth. Even bankers were shocked about letting the market set the price – but it’s served Australia well.Selwyn Cornish, Honorary Associate Professor, Research School of Economics, Australian National UniversityJohn Hawkins, Senior Lecturer, Canberra School of Politics, Economics and Society, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2188062023-11-29T06:27:43Z2023-11-29T06:27:43ZInflation now starts with a 4, allowing the RBA to hold fire on rates<figure><img src="https://images.theconversation.com/files/562372/original/file-20231129-21-3rb6av.png?ixlib=rb-1.1.0&rect=1928%2C700%2C2047%2C1311&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/brisbane-queensland-australia-mar-14-2022-2135239757">Shutterstock</a></span></figcaption></figure><p>Australia’s inflation rate has dived from 5.6% to <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/monthly-consumer-price-index-indicator/oct-2023">4.9%</a> in October, pushing it below 5% for the first time in 20 months.</p>
<p>The Australian Bureau of Statistics figures relate to the newer monthly measure of annual inflation, rather than the traditional quarterly measure, which came in at <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release">5.4%</a> in the September quarter, down from 6% in the June quarter.</p>
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<p>Pushing down the annual inflation rate was a <em>fall</em> in average prices in October. </p>
<p>In October average prices fell 0.3%, driven down by a 2.9% fall in the price of petrol, a 7% fall in the price of price of holiday travel and accommodation, and a 2.5% fall in the price of household gas.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-further-rba-rate-hikes-are-less-likely-now-than-even-1-week-ago-218225">Why further RBA rate hikes are less likely now than even 1 week ago</a>
</strong>
</em>
</p>
<hr>
<p>Even the average cost of rent fell 0.4% in the month, driven down by an increase in Commonwealth Rent Assistance. </p>
<p>The bureau says without the increase in rent assistance, measured rents would have climbed 0.7% making annual growth 8.6% instead of 7.6%.</p>
<p>The easing of inflation wasn’t limited to just a few sectors. So-called core inflation, which excludes volatile items like fruit, fuel and holiday travel, also experienced a decline, falling from 5.5% to 5.1%.</p>
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<h2>It means the RBA can relax just a bit</h2>
<p>Economists who had anticipated a higher rate are now reconsidering their expectations for next week’s Reserve Bank board meeting, believing a further increase in interest rates at that meeting is now much less likely.</p>
<p>However, it is important not to get carried away with one month’s news. </p>
<p>We have previously seen inflation dip in a single month only to bounce back later.</p>
<p>Still, it is welcome news in the lead-up to the festive season.</p>
<p>It comes on top of news of very soft retail sales in October, up just <a href="https://www.abs.gov.au/statistics/industry/retail-and-wholesale-trade/retail-trade-australia/oct-2023">1.2%</a> over a year in which we now know prices grew 4.9% and the population grow by about 2.4%, implying a fall in purchases per person of around 6%</p>
<h2>Falling inflation in the US is about to help</h2>
<p>While a lot of the fall in Australian inflation in October was due to lower oil prices, a lot from here on will be driven by a much higher Australian dollar, which climbed from 63.4 US cents to 66.5 US cents throughout November – an increase approaching 5%.</p>
<p>The higher dollar means that even if the price of oil and other overseas prices don’t fall further in November, they should fall further in Australian dollars. </p>
<p>The Australian dollar has climbed because the US dollar has fallen amid expectations that no further US interest rate hikes will be needed in the light of much lower inflation throughout the Western world.</p>
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<hr>
<p>Having said that, inflation in the cost of Australian services, from <a href="https://www.rba.gov.au/speeches/2023/sp-gov-2023-11-22.html">haircuts to dentistry</a>, continues to concern Reserve Bank Governor Michele Bullock.</p>
<p>We will know more when the Australian Bureau of Statistics releases the major quarterly inflation report at the end of January ahead of the first Reserve Bank board meeting for the year on Monday and Tuesday February 5 and 6.</p>
<p>The Reserve Bank’s goal of bringing inflation back to its target band of 2-3% by <a href="https://www.rba.gov.au/monetary-policy/rba-board-minutes/2023/2023-11-07.html">late 2025</a> remains challenging, especially with ongoing price pressures in the labor-intensive services sector.</p>
<p>Still, if Australia can mimic the success of the US and other Western countries in continuing to bring inflation down, interest rates should peak soon, and perhaps even fall sometime in 2024.</p><img src="https://counter.theconversation.com/content/218806/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>Average prices fell in October, driven down by dives in the price of petrol and overseas travel, and an increase in Commonwealth Rent assistance.Isaac Gross, Lecturer in Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2186002023-11-28T05:47:19Z2023-11-28T05:47:19ZGovernments have been able to overrule the Reserve Bank for 80 years. Why stop now?<p>Pay close enough attention to parliament these next few days, and you’re likely to witness something truly remarkable: politicians from both sides of politics uniting to remove the power of politicians to overrule the Reserve Bank.</p>
<p>As an instance of self-loathing, it’s hard to top.</p>
<p>Sure, a good many of us don’t trust politicians. But surely politicians ought to trust politicians. Surely politicians ought to realise that we put them there to make decisions – not usually the day-to-day decisions, but the ultimate big decisions. They are meant to be <a href="https://artsandculture.google.com/story/the-buck-stops-here-u-s-national-archives/_wWRD9NkonH0JA?hl=en">where the buck stops</a>.</p>
<p>That Treasurer Jim Chalmers could be even thinking about <a href="https://ministers.treasury.gov.au/ministers/jim-chalmers-2022/media-releases/strengthening-and-modernising-reserve-bank">axing</a> his ultimate power to veto decisions of the Reserve Bank board shows just how far the myth of an “independent Reserve Bank” has spread.</p>
<p>Scroll through the treasurer’s website, and you’ll find 195 documents referring to the “<a href="https://ministers.treasury.gov.au/search/node?keys=%22independent+reserve+bank%22">independent Reserve Bank</a>”, many multiple times.</p>
<h2>‘Independent’, but not according to the law</h2>
<p>Saying the Reserve Bank is independent suits the treasurer and it suits the prime minister, just as it has suited many of their predecessors. As soon as the bank does something that’s necessary but unpopular (such as pushing up interest rates) they are able to say – wrongly – there’s nothing they can do.</p>
<p>The government’s Reserve Bank is dependent on the government in myriad ways. </p>
<p>The government <a href="https://www.legislation.gov.au/Details/C2015C00201">set up</a> the Reserve Bank. The government appoints every member of its board. The government directly appoints its <a href="https://ministers.treasury.gov.au/ministers/jim-chalmers-2022/media-releases/new-governor-reserve-bank-australia">chief</a> and <a href="https://theconversation.com/meet-andrew-hauser-the-outsider-from-the-uk-wholl-be-deputy-governor-of-the-rba-217521">deputy chief</a>. And from time to time the government gives it <a href="https://www.rba.gov.au/monetary-policy/framework/stmt-conduct-mp-7-2016-09-19.html">running instructions</a>.</p>
<p>But – most importantly – the government can overrule it.</p>
<p>The mechanism is <a href="http://classic.austlii.edu.au/au/legis/cth/consol_act/rba1959130/s11.html">built into</a> the Reserve Bank Act.</p>
<p>In the event of a disagreement, the treasurer can</p>
<blockquote>
<p>submit a recommendation to the governor-general, and the governor-general, acting with the advice of the Federal Executive Council, may, by order, determine the policy to be adopted by the bank.</p>
</blockquote>
<p>The government is to accept responsibility for the decision taken, and the Reserve Bank board must </p>
<blockquote>
<p>thereupon ensure that effect is given to the policy determined by the order and shall, if the order so requires, continue to ensure that effect is given to that policy while the order remains in operation.</p>
</blockquote>
<p>After so directing the bank, the treasurer is to table in parliament a copy of the direction, along with a statement explaining the reasons, and a statement from the Reserve Bank board putting the case that failed to convince the treasurer.</p>
<p>These are the clauses – until now unused – that in April the outside review of the Reserve Bank <a href="https://rbareview.gov.au/final-report">asked the government to do away with</a>.</p>
<p>Its thinking was that the government can’t be trusted.</p>
<p>As the review put it,</p>
<blockquote>
<p>if an elected government controls monetary policy there are risks that it may try to push the economy to run above its capacity, resulting in higher inflation but with no lasting impact on employment.</p>
</blockquote>
<p>On releasing the review’s recommendations, Treasurer Jim Chalmers said straight away that he agreed in principle with <a href="https://ministers.treasury.gov.au/ministers/jim-chalmers-2022/media-releases/review-reserve-bank-australia">all of them</a>.</p>
<p>Shadow Treasury Angus Taylor said <a href="https://www.angustaylor.com.au/media/media-releases/coalition-welcomes-release-rba-review">much the same thing</a>, although he now says the Coalition will wait until <a href="https://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;page=0;query=BillId%3Ar7126%20Recstruct%3Abillhome">sees the legislation</a> Chalmers is about to introduce before deciding its position on it.</p>
<h2>The veto power is there for a reason</h2>
<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, April 2023</a></span>
</figcaption>
</figure>
<p>On the face of it, a reasonable position would be that the government’s ability to overrule the bank in extreme circumstances has caused no problem so far.</p>
<p>The review counters this by warning of “the possibility that established conventions cease to be observed”.</p>
<p>But, if that did happen, it would be because there was a serious (and ultimately public) rift between the elected government and an unelected board.</p>
<p>With the exception of judges in Australia’s courts, unelected officials can’t normally overrule elected governments. It’s how our system is designed.</p>
<p>The Reserve Bank tried to overrule the government once, and succeeded, which is why the provision we have was written into the law.</p>
<p>Back in 1930, in the early years of the Great Depression, the Reserve Bank was part of the Commonwealth-owned Commonwealth Bank, run by a board appointed by the government which reported to the government.</p>
<p>In The Conversation earlier this year, <a href="https://theconversation.com/jim-chalmers-wants-a-truly-independent-rba-he-should-be-careful-what-he-wishes-for-204550">Alex Millmow</a> outlined what happened.</p>
<p>Desperate to support the economy, the government begged the government-owned bank to help it finance public works.</p>
<p>The bank refused. Its government-appointed chairman, Sir Robert Gibson, wrote to Treasurer Ted Theodore <a href="https://historichansard.net/hofreps/1931/19310417_reps_12_128/">warning a point was being reached</a></p>
<blockquote>
<p>beyond which it would be impossible for the Commonwealth Bank to provide further financial assistance for the governments in the future</p>
</blockquote>
<p>Theodore replied complaining the bank was trying to </p>
<blockquote>
<p>arrogate to itself a supremacy over the government in the determination of the financial policy of the Commonwealth, a supremacy which, I am sure, was never contemplated by the framers of the Australian Constitution</p>
</blockquote>
<p>While the government did not question the right of the bank’s board to offer such comment or criticism as the board thought proper, the control of the public purse had “heretofore always been regarded as an essential prerogative of the people”.</p>
<p>In the end, it was the government that backed down. But to ensure it could never be overruled again, Labor wrote the veto power into the Commonwealth Bank Act of 1945 and the Coalition wrote it into the <a href="https://www.legislation.gov.au/Details/C2015C00201">Reserve Bank Act of 1959</a>.</p>
<p>That’s the veto power today’s Labor Party, quite possibly with the support of the Coalition, is about to try to remove.</p>
<p>I understand why the Reserve Bank review made the recommendation it did: it wants monetary policy to work well. But I don’t think that’s enough of a reason for the government to attempt to abrogate its responsibility.</p>
<p>And ultimately, it can’t. The Australian public is going to hold the government responsible for the state of the economy even if it succeeds in tying one hand behind its back. But I don’t think it’s wise. One day it might need it.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/jim-chalmers-wants-a-truly-independent-rba-he-should-be-careful-what-he-wishes-for-204550">Jim Chalmers wants a truly independent RBA. He should be careful what he wishes for</a>
</strong>
</em>
</p>
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<img src="https://counter.theconversation.com/content/218600/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin is Economics Editor of The Conversation. </span></em></p>Sure, a good many of us don’t trust politicians – but surely politicians ought to trust politicians. History shows why they might one day need to overturn a Reserve Bank decision.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2175212023-11-27T21:57:50Z2023-11-27T21:57:50ZMeet Andrew Hauser, the outsider from the UK who’ll be deputy governor of the RBA<figure><img src="https://images.theconversation.com/files/561774/original/file-20231127-26-uesu4r.png?ixlib=rb-1.1.0&rect=83%2C906%2C2556%2C1314&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Andrew Hauser, currently executive director for markets at the Bank of England.</span> <span class="attribution"><span class="source">Australian Treasury</span></span></figcaption></figure><p>In a significant step towards reforming Australia’s Reserve Bank, Treasurer Jim Chalmers has stepped outside the bank and outside of Australia to select Andrew Hauser, a British economist, as its <a href="https://ministers.treasury.gov.au/ministers/jim-chalmers-2022/media-releases/new-deputy-governor-reserve-bank-australia">new deputy governor</a>. </p>
<p>The deputy governor’s job has traditionally been a springboard to the governor’s job, and Hauser will replace Michele Bullock who was herself deputy governor until her appointment as governor on Philip Lowe’s retirement in September.</p>
<p>Hauser is the first deputy governor to be appointed from outside the bank, and also the first non-Australian to be appointed to a high-ranking position in the bank.</p>
<p>The selection of a complete outsider is a sign that Treasurer Jim Chalmers has taken on board the concerns of the independent review of the Reserve Bank which in April expressed concern about what it called <a href="https://rbareview.gov.au/final-report">groupthink</a> at the bank, which it defined as</p>
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<p>a phenomenon in which a group of individuals tries to minimise conflict and
reach a consensus decision without critical evaluation of alternative viewpoints,
by actively suppressing dissenting viewpoints and isolating themselves from
outside influences</p>
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<p>The review found a “lack of openness to external ideas” at the bank and a tendency to avoid difficult discussions to resolve issues.</p>
<p>It wanted the bank “open to diverse voices” and suggested advertising vacancies for management roles externally as a default, with external members on all selection panels for deputy-head of department roles and above.</p>
<h2>The RBA and the Bank of England face similar challenges</h2>
<p>Hauser has worked at the Bank of England for over 30 years, giving him a deep understanding of the operation of monetary policy in an open economy similar to Australia’s, in which interest rates and the the exchange rates are important economic levers.</p>
<p>If the experience of his former governor at the Bank of England, Mark Carney, is any guide, he’ll make the transition without too much difficulty.</p>
<p>Carney was appointed Governor of the Bank of England in 2013 from Canada where he had been Governor of the Bank of Canada, and served until 2020.</p>
<p>Hauser’s experience as executive director for markets at the Bank of England and his involvement in managing its response to the global financial crisis and the early stages of COVID will make him especially useful to Australia’s Reserve Bank.</p>
<p>The Reserve Bank has been without top-level experience in managing markets during crises since the departure of <a href="https://www.rba.gov.au/media-releases/2022/mr-22-07.html">Guy Debelle</a> in March 2022.</p>
<p>Debelle had long been the bank’s point person on markets. As head of its financial markets group during the crisis he coordinated and directed the bank’s attempt to keep financial markets open on a daily basis, a role he fulfilled again as deputy governor during the COVID crisis.</p>
<h2>Hauser will help the bank decide how quickly to shrink</h2>
<p>A major challenge for the bank under Hauser’s deputy governorship will be managing the size of its balance sheet. </p>
<p>During the COVID crisis, the bank bought government bonds with money it created in order to support the economy and keep interest rates low. </p>
<p>This led to a <a href="https://www.rba.gov.au/statistics/balance-sheet/">quadrupling</a> of its balance sheet, from A$161.4 billion in financial assets before COVID to a peak of $637 billion in March this year.</p>
<p>Now that the crisis has passed, the bank is slowly contracting its balance sheet by gradually letting the bonds they bought expire. </p>
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<em>
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Read more:
<a href="https://theconversation.com/rba-revolution-how-chalmers-will-recraft-the-bank-for-the-21st-century-204139">RBA revolution: how Chalmers will recraft the bank for the 21st century</a>
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<p>At issue is whether the bank should contract its balance sheet faster (and contract the economy) by actively selling bonds, and also when it should stop selling bonds and letting them expire.</p>
<p>While these are new questions for the Reserve Bank, the Bank of England has been grappling with them for years, having bought bonds with created money during the global financial crisis.</p>
<p>As executive director of markets at the Bank of England, Andrew Hauser is well versed in the problem. He outlined the issues earlier this month in what might be his <a href="https://www.bis.org/review/r231107a.htm">final speech</a> for the Bank of England, entitled “Less is more or less is a bore? Re-calibrating the role of central bank reserves”.</p>
<p>His appointment marks a pivotal moment in the Reserve Bank’s history, underlining the government’s commitment to revitalising the bank and refashioning it for the 21st century.</p>
<p>He is expected to take up his new role in early 2024.</p><img src="https://counter.theconversation.com/content/217521/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>Treasurer Jim Chalmers has made the first ever Reserve Bank appointment from outside the country as part of an effort to fight ‘groupthink’.Isaac Gross, Lecturer in Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2182252023-11-21T10:08:58Z2023-11-21T10:08:58ZWhy further RBA rate hikes are less likely now than even 1 week ago<figure><img src="https://images.theconversation.com/files/560651/original/file-20231121-19-d1cauc.png?ixlib=rb-1.1.0&rect=878%2C761%2C2660%2C1388&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>Since Australia’s Reserve Bank hiked interest rates two weeks ago, there have been two important developments – one in the United States and the other in the United Kingdom.</p>
<p>If it’s not clear to you why events overseas influence Australia’s interest rates, which are meant to be set to control Australian inflation, read on.</p>
<h2>US and UK inflation close to zero</h2>
<p>We haven’t been complete masters of our own destiny since the Australian dollar was floated <a href="https://www.smh.com.au/business/inside-the-floating-of-the-a-20131211-2z6ic.html">40 years ago next month</a>.</p>
<p>What happened in the US last Tuesday was news of dramatically lower US inflation. When increases and decreases in prices were taken together, overall US prices moved not at all in the month of October. That’s right, inflation was <a href="https://www.bls.gov/news.release/cpi.nr0.htm">zero</a>.</p>
<p>While zero movement in one month doesn’t mean zero over the entire year, it helps bring down the rate over the entire year. US inflation fell from 3.7% in the year to September to <a href="https://www.bls.gov/news.release/cpi.nr0.htm">3.2%</a> in the month to October.</p>
<p>Then the next day we got similar news from the UK. </p>
<p>Taken together, prices in the United Kingdom scarcely grew at all in October, climbing just <a href="https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/october2023">0.1%</a>. The screeching halt to UK monthly inflation took the annual rate down from 6.7% for the year to September to <a href="https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/october2023">4.6%</a> for the year to October.</p>
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<p>In both the <a href="https://www.smh.com.au/business/the-economy/mission-accomplished-fed-s-inflation-success-raises-hopes-for-rba-20231115-p5ek2k.html">US</a> and the <a href="https://www.reuters.com/markets/rates-bonds/bank-englands-pill-says-central-bank-may-be-able-reconsider-rates-stance-next-2023-11-06/">UK</a>, there’s talk there will be no need for further interest rate hikes, and very probably a case for interest rate cuts as soon as next year.</p>
<p>We don’t yet know what happened to Australia’s inflation rate in October – the Bureau of Statistics will tell us next week.</p>
<p>But we have an early indication.</p>
<p>The Melbourne Institute inflation gauge, which roughly tracks the bureau’s measure, <a href="https://tradingeconomics.com/australia/mi-inflation-gauge-mom">fell 0.1%</a> in October. If that is what the bureau finds – that overall prices barely moved (or fell) in October – Australia’s annual inflation rate should fall from 5.6% for the year to September to around 5.2% for the year to October. </p>
<h2>Inflation down all over</h2>
<p>All over the world, inflation is falling for much the same set of reasons: the price of oil is heading back down after Saudi Arabia and Russia tried to <a href="https://www.bbc.com/news/business-65804768">restrict supply</a> in the middle of the year, and the price pressures caused by shortages are easing.</p>
<p>As Australia’s Reserve Bank conceded in the <a href="https://www.rba.gov.au/monetary-policy/rba-board-minutes/2023/2023-11-07.html">minutes</a> of the November board meeting, in which it pushed up rates, there has been “an easing in supply chain pressures and raw materials prices”.</p>
<p>Not that this means the bank is relaxed about what’s happening to inflation; far from it.</p>
<p>In the minutes released on Tuesday and in <a href="https://rba.livecrowdevents.tv/MicheleBullockGovernorattheASICAnnualForum21nov/stream">remarks delivered at a conference</a> ahead of their release, Governor Michele Bullock said what concerned her was stronger-than-expected <a href="https://www.rba.gov.au/monetary-policy/rba-board-minutes/2023/2023-11-07.html">demand pressures</a>. Australians remained keen to spend.</p>
<p>And she drew attention to disturbing</p>
<blockquote>
<p>growing signs of a mindset among businesses that any cost increases could be passed onto consumers </p>
</blockquote>
<p>But what has just happened overseas will help, big time. Here’s why.</p>
<h2>Australians’ buying power just jumped</h2>
<p>As soon as the news of low US inflation came out last Tuesday, the US dollar <a href="https://www.reuters.com/markets/currencies/yens-slide-multi-decade-lows-keeps-markets-intervention-alert-2023-11-14">slid</a>. </p>
<p>Investors became less keen to hold US dollars when it became less likely that US interest rates would rise further, and a good deal more likely they would fall.</p>
<p>Against the Australian dollar, the US dollar fell 2%. From an Australian’s point of view, the buying power of an Australian dollar jumped from 63.7 to 64.9 US cents and has since jumped to 65.8 US cents. </p>
<hr>
<p><strong>A sudden jump in the value of the Australian dollar</strong></p>
<hr>
<p>This means that, for as long as it lasts, Australian dollars will buy more than they did. </p>
<p>Australians will pay less in Australian dollars for the goods and services ultimately paid for with US dollars. The changed interest rate outlook in the US will act to keep Australian prices low.</p>
<p>In this way, decisions made in the US not to increase interest rates or even to cut them make it easier for Australia’s Reserve Bank not to increase rates – or even to cut them.</p>
<h2>A higher dollar means lower inflation</h2>
<p>The effect isn’t big. The RBA believes it takes a 10% change in the value of the Australian dollar to move the Australian
inflation rate <a href="https://www.afr.com/markets/debt-markets/diverging-rate-outlook-turbocharges-a-as-us-inflation-eases-20231115-p5ek13">0.4 percentage points</a>.</p>
<p>But it is better than things moving in the other direction, which is what has been happening until now. </p>
<p>For more than a year now, whenever interest rates have climbed in the US, Australia’s Reserve Bank has been under pressure to push up its rates to stop the Australian dollar falling and prices climbing.</p>
<p>No longer. After last week’s news from the US and the UK, Australian financial markets began pricing in a <a href="https://www.asx.com.au/markets/trade-our-derivatives-market/futures-market/rba-rate-tracker">close to zero</a> chance of further interest rate rises – with a fair chance of a rate cut next year.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/why-its-a-good-bet-the-melbourne-cup-day-rate-hike-will-be-the-last-217094">Why it's a good bet the Melbourne Cup Day rate hike will be the last</a>
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<p>It’s always impossible to tell for sure what the Reserve Bank will do to rates. A lot will depend on what actually happens to inflation. </p>
<p>But for the first time in a long time, the Reserve Bank has tail winds from overseas, rather than headwinds.</p>
<p>For the first time in a long time, the bank won’t feel pressured to push up rates just because rates have been pushed up overseas.</p><img src="https://counter.theconversation.com/content/218225/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin is Economics Editor of The Conversation. </span></em></p>Australian financial markets are now pointing to a close to zero chance of further rate rises – with a fair chance of a rate cut next year. That’s thanks to the latest news from the US and UK.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2170942023-11-07T05:48:11Z2023-11-07T05:48:11ZWhy it’s a good bet the Melbourne Cup Day rate hike will be the last<p>Australia just became the odd one out.</p>
<p>At its meeting last week, the <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20231101a.htm">US Federal Reserve</a> kept its official interest rate on hold. A week earlier, the <a href="https://www.ecb.europa.eu/press/pr/date/2023/html/ecb.mp231026%7E6028cea576.en.html">European Central Bank</a> and the <a href="https://www.bankofcanada.ca/core-functions/monetary-policy/key-interest-rate/">Bank of Canada</a> kept their rates on hold, and, at their meetings before that, the <a href="https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2023/september-2023">Bank of England</a> and the <a href="https://www.rbnz.govt.nz/monetary-policy/about-monetary-policy/the-official-cash-rate#">Reserve Bank of New Zealand</a> did the same thing.</p>
<p>Throughout the Western world – with perhaps Australia as the only exception – financial markets have been assuming central banks were done with increasing rates and would soon start <a href="https://www.ft.com/content/c7e712e8-12be-4d25-82e5-e53bd3bb3311">pushing them down</a>.</p>
<p>Reserve Bank Governor Michele Bullock’s <a href="https://www.rba.gov.au/media-releases/2023/mr-23-30.html">statement</a> accompanying Tuesday’s hike in Australia’s cash rate makes it look as if we’re about to join that club. It makes it look as if this hike from 4.1% to 4.35% – a 12-year high – will be the last.</p>
<p>And with good reason. Inflation has been falling almost everywhere, and – notwithstanding the recent uptick associated with higher oil prices – is forecast by the International Monetary Fund to keep falling.</p>
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<h2>The RBA has taken out insurance</h2>
<p>So why did Australia’s Reserve Bank push up rates at all, at a time when none of its global peers were? </p>
<p>The statement makes it look as if it wanted to take out insurance.</p>
<p>While the bank still expects inflation to continue to fall, it says progress now looks “slower than earlier expected”.</p>
<p>Its revised set of forecasts, to be released <a href="https://www.rba.gov.au/publications/">on Friday</a>, still have inflation falling, but to around 3.5% by the end of next year, instead of 3.3%, then to around 3% by the end of 2025 instead of <a href="https://www.rba.gov.au/publications/smp/2023/aug/forecasts.html">2.8%</a>.</p>
<p>The bank is particularly worried that the prices of services – things such as service in a cafe, done by hard-to-find workers – are “continuing to rise briskly”. </p>
<p>And it mentions “uncertainties” four times in eight paragraphs. It isn’t that it thinks inflation won’t keep coming down; it’s that it wants to be <em>sure</em> it is.</p>
<h2>Australian hikes hit harder than in the US</h2>
<p>One argument the bank hasn’t used – and nor should it – is catch-up. The US, the UK, the EU, Canada and New Zealand all have higher official rates than Australia.</p>
<p>But they are all are different to Australia, in an important way.</p>
<p>When the US Federal Reserve pushes up its Federal Funds Rate, nothing much happens to US home borrowers. Here’s why: almost all US home borrowers are on <a href="https://www.rba.gov.au/publications/smp/2023/feb/pdf/box-a-mortgage-interest-payments-in-advanced-economies.pdf">fixed rates</a>, meaning their required mortgage payments don’t increase. </p>
<p>In Australia, only about <a href="https://www.rba.gov.au/publications/bulletin/2023/mar/fixed-rate-housing-loans-monetary-policy-transmission-and-financial-stability-risks.html">one-third</a> of home loans are fixed.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/557939/original/file-20231107-17-o2ccma.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Stack of US $100 notes" src="https://images.theconversation.com/files/557939/original/file-20231107-17-o2ccma.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/557939/original/file-20231107-17-o2ccma.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=965&fit=crop&dpr=1 600w, https://images.theconversation.com/files/557939/original/file-20231107-17-o2ccma.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=965&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/557939/original/file-20231107-17-o2ccma.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=965&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/557939/original/file-20231107-17-o2ccma.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1213&fit=crop&dpr=1 754w, https://images.theconversation.com/files/557939/original/file-20231107-17-o2ccma.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1213&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/557939/original/file-20231107-17-o2ccma.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1213&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">In the US, mortgage rates are fixed for up to the life of the loan.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
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<p>And US fixed rates are nothing like Australian fixed rates. The <a href="https://www.rba.gov.au/publications/smp/2023/feb/pdf/box-a-mortgage-interest-payments-in-advanced-economies.pdf">typical term</a> in the US is 30 years, rather than the two to three years common in Australia.</p>
<p>This means that, as long as borrowers in the US don’t refinance or move homes, their payments are fixed for the entire term of their loans. Americans never have to pay more just because the Fed jacks up rates. </p>
<p>At least when it comes to homebuyers, the US Fed has to do a good deal more than Australia’s Reserve Bank to have the same effect.</p>
<p>It means the US official rate of 5.25% has less immediate effect on ordinary Americans than Australia’s new rate of 4.35% will have on us.</p>
<p>That’s what the consumer spending figures show. </p>
<p>After a year of high US rates, American consumers are buying 2.9% <a href="https://www.census.gov/retail/sales.html"><em>more</em></a> goods and services than they were a year ago. </p>
<p>After a year of less-high Australian rates, Australian consumers are buying 1.7% <a href="https://www.abs.gov.au/statistics/industry/retail-and-wholesale-trade/retail-trade-australia/sep-2023#"><em>less</em></a>.</p>
<p>This means that, as relatively lightweight as our previous 4.1% cash rate had seemed, it might have been packing more punch than the higher 5.25% rate in the US; and also the higher rates in the UK, Canada and New Zealand, where most of the mortgages are <a href="https://www.rba.gov.au/publications/smp/2023/feb/pdf/box-a-mortgage-interest-payments-in-advanced-economies.pdf">also fixed</a>.</p>
<h2>‘Painful squeeze’</h2>
<p>In her statement, Governor Bullock acknowledged many households were experiencing “<a href="https://www.rba.gov.au/media-releases/2023/mr-23-30.html">a painful squeeze on their finances</a>”. She also noted others were benefiting from rising housing prices, substantial savings buffers and higher interest income. </p>
<p>Bank calculations suggest one in 20 variable-rate borrowers are now going backwards – paying more for essential expenses and housing than they earn. </p>
<p>Among borrowers with big loans relative to their incomes, it’s <a href="https://www.rba.gov.au/speeches/2023/sp-gov-2023-10-24.html">one in four</a>.</p>
<p>There’s nothing in the governor’s statement to suggest she is thinking of pushing up rates again. After today’s hike, the futures market assigned only a <a href="https://www.asx.com.au/markets/trade-our-derivatives-market/futures-market/rba-rate-tracker">30%</a> probability to another hike. </p>
<p>The best guess of people who bet on this for a living is that Australia is about to join the rest of the world and leave rates where they are for quite some time.</p>
<h2>A frugal Christmas, before possible rate drops in 2024</h2>
<p>Alternatively, rates could even begin coming down within 12 months.</p>
<p>The detail of the inflation figures shows monthly inflation surged to 0.8% for one month only, in August, when petrol and diesel prices jumped 9.1%, then fell back to <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/monthly-consumer-price-index-indicator/latest-release#data-downloads">0.3%</a> in September, which is where it was before petrol prices jumped.</p>
<p>It is also looking like prices scarcely increased at all last month. </p>
<p>The Melbourne Institute inflation gauge, which comes out ahead of the Bureau of Statistics gauge and broadly tracks it, fell 0.1% in October. This suggests that, when taken together, price falls (<a href="https://tradingeconomics.com/australia/mi-inflation-gauge-mom">slightly more than</a>) outweighed price increases.</p>
<p>It’s what you would expect if we were tightening our belts, <a href="https://www.abs.gov.au/statistics/industry/retail-and-wholesale-trade/retail-trade-australia/sep-2023#">as we are</a>. </p>
<p>At Big W discount department stories across Australia, sales are down <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02729605-2A1482720?access_token=83ff96335c2d45a094df02a206a39ff4">5.5%</a> on where they were a year ago. </p>
<p>Big W says shoppers have moved away from buying big-ticket items and are instead buying a <a href="https://www.afr.com/chanticleer/woolies-watching-housing-pain-as-cpi-stokes-rate-rise-fears-20231025-p5eez9">remarkable</a> number of small gifts, such as Hot Wheels toy cars. </p>
<p>They sell for $2 each, or five for $9.</p>
<p>It’s pointing to a frugal Christmas in which retailers are going to have to discount if they want to move goods, taking further pressure off inflation.</p>
<p>Should that happen, rates could turn down even sooner than financial market traders expect, perhaps by the middle of next year.</p>
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Read more:
<a href="https://theconversation.com/petrol-is-holding-up-inflation-the-7-graphs-that-show-whats-happening-to-prices-and-what-it-will-mean-for-interest-rates-215888">Petrol is holding up inflation – the 7 graphs that show what's happening to prices and what it will mean for interest rates</a>
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<img src="https://counter.theconversation.com/content/217094/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin is Economics Editor of The Conversation.</span></em></p>It’ll now be a frugal Christmas in many Australian homes. But there is a glimmer of good news: if we do tighten our belts, rates could start to come down by as early as the middle of next year.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2167162023-10-31T03:53:40Z2023-10-31T03:53:40ZThink the RBA will lift rates on Melbourne Cup day? Don’t bet your house on it<p>Each of Australia’s big four banks is now predicting a rate rise in six days’ time on Melbourne Cup Tuesday. It would add another A$77 to the monthly cost of servicing a $500,000 mortgage and be enough to take the total extra monthly impost since rates began climbing to more than $1,000.</p>
<p>Why on earth would they be expecting the Reserve Bank to lift rates at a time when Australians are <a href="https://www.abs.gov.au/statistics/industry/retail-and-wholesale-trade/retail-trade-australia/sep-2023">buying less</a> than they were a year ago and the most trusted measure of annual inflation, the comprehensive <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release">quarterly</a> one, is heading down? </p>
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<p>It isn’t because the newer and more jumpy <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/monthly-consumer-price-index-indicator/latest-release">monthly</a> measure of inflation is heading up. The Reserve Bank doesn’t yet take it particularly seriously and doesn’t include it in its forecasts.</p>
<p>It’s largely because of something the new governor Michele Bullock said about the bank’s forecasts that appeared to back her board into a corner.</p>
<p>In a <a href="https://www.rba.gov.au/speeches/2023/sp-gov-2023-10-24.html">speech</a> delivered last Tuesday, just one day before the inflation figures that showed the annual rate continuing to fall, she said </p>
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<p>the board will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation. </p>
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<p>And, even though inflation was falling, Wednesday’s figures showed an upward revision in the outlook.</p>
<p>Inflation had fallen, but not as far as the bank expected it to.</p>
<p>At the end of last year, the inflation rate was 7.8% – the highest in three decades. But by the June quarter this year it had slid to 6%. And on Wednesday we learnt that in the September quarter it slipped to 5.4%, which looks good, except the bank had been expecting more.</p>
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<p>The bank’s <a href="https://www.rba.gov.au/publications/smp/2023/aug/pdf/forecast-table-2023-08.pdf">forecasts</a> had it hitting 4.1% by December. To get to there from 5.4% in one quarter now looks all but impossible. </p>
<p>On my calculations prices would need to barely climb at all in the December quarter, increasing by an usually low 0.6%. More likely is an annual increase of 1% in the quarter, taking the inflation rate to 4.5%, which would be a continued improvement but not the improvement to 4.1% the bank had forecast.</p>
<p>Here’s why that matters now, for the Reserve Bank’s board meeting on Melbourne Cup day. </p>
<p>Not all board meetings are equal. Every third month the meeting is special. In the special months of February, May, August and November the board receives a quarterly update of staff forecasts along with commentary about why previous forecasts have been missed. </p>
<p>The board gets that update next Tuesday.</p>
<h2>November is always an important meeting</h2>
<p>By saying the board “will not hesitate to raise the cash rate further” if there is a material upward revision to the outlook for inflation, Bullock appears to have committed her board to raising interest rates further.</p>
<p>There will be an upward revision, no doubt about it. Instead of forecasting an inflation rate of 4.1% for the year to December, the staff will forecast an inflation rate closer to 4.5%.</p>
<p>Luci Ellis, the new chief economist at Westpac is one of the big bank economists using <a href="https://library.westpaciq.com.au/content/dam/public/westpaciq/secure/economics/documents/aus/2023/10/er20231026BullRBAsNextMove.pdf">precisely this logic</a>. But she has added a big “but”.</p>
<p>Until October, Ellis had worked for the Reserve Bank for 32 years, for the past seven years as assistant governor, economic. She used to brief the board.</p>
<p>She says it is entirely possible for the bank to upgrade its inflation forecast for December, but not its forecasts for 2024 and beyond. </p>
<p>That way, staff could argue “there had been no material upward revision to the <em>outlook</em> for inflation, only to the history”.</p>
<p>Much of the surprise in the September quarter inflation result was due to one price – the price for “automotive fuel”. </p>
<p>Had that one price not jumped an astonishing 7.2% in just three months in line with a global increase in the price of oil, Bureau of Statistics calculations suggest Australia’s annual inflation rate would have been <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/sep-quarter-2023/640104.xlsx">5.1%</a> rather than the 5.4% recorded, sliding in line with the Reserve Bank’s forecasts.</p>
<h2>The board might put the price of oil to one side</h2>
<p>Ellis says bank staff could argue that the jump in the price of petrol and diesel was a one-off, that “bygones are bygones”, and the jump hasn’t materially affected the bank’s long-term forecasts.</p>
<p>Those forecasts are for inflation to fall to <a href="https://www.rba.gov.au/publications/smp/2023/aug/pdf/forecast-table-2023-08.pdf">3.3%</a> by the end of 2024 and back to 2.9% – within the bank’s 2-3% target band – by the end of 2025.</p>
<p>In little-reported remarks, the governor herself has lent support to the idea.</p>
<p>After saying last week the board would not hesitate to raise rates further if there was a material upward revision to the outlook for inflation in the <a href="https://www.rba.gov.au/speeches/2023/sp-gov-2023-10-24.html">formal</a> part of her speech Governor Bullock, elaborated on what she meant by “outlook” in an <a href="https://www.rba.gov.au/speeches/2023/sp-gov-2023-10-24-q-and-a-transcript.html">answer</a> to a question.</p>
<p>She said the bank’s current forecasts had inflation coming back in to the top of its target band in 2025.</p>
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<p>So, yes, it is a reasonable tolerance, but we don’t have a lot of tolerance for it to shift out – that’s sort of at the end of our tolerance, I think.</p>
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<p>She was referring to the forecast for 2025. It was a shift-out in that forecast that she had little tolerance for, rather than a shift out in the forecast for 2023.</p>
<p>Which makes the decision to be made on Melbourne Cup Day less clear-cut than at first sight. Yes, inflation will be higher in December than the bank had forecast. But if the bank’s revised forecasts have it no higher in December 2025 than they do at the moment, there might not be any particular reason to push up rates.</p>
<p>Financial markets bet real money on the outcome of decisions like next Tuesday’s, unlike bank economists (and people such as myself) who merely opine.</p>
<p>At the start of this week the prices quoted on the Australian Securities Exchange implied a <a href="https://www.asx.com.au/markets/trade-our-derivatives-market/futures-market/rba-rate-tracker">52%</a> probability of an increase in the Reserve Bank cash rate next Tuesday and a 48% probability of no change. That’s anything but a sure thing.</p>
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Read more:
<a href="https://theconversation.com/petrol-is-holding-up-inflation-the-7-graphs-that-show-whats-happening-to-prices-and-what-it-will-mean-for-interest-rates-215888">Petrol is holding up inflation – the 7 graphs that show what's happening to prices and what it will mean for interest rates</a>
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<img src="https://counter.theconversation.com/content/216716/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin is Economics Editor of The Conversation.</span></em></p>The governor’s remarks about the board “not hesitating” to raise rates further aren’t as clear cut as they seem.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2164412023-10-26T09:40:46Z2023-10-26T09:40:46ZGrattan on Friday: Cost-of-living crisis is the dragon the government can’t slay<p>At a White House briefing early this week, Joe Biden’s press secretary, Karine Jean-Pierre, was asked whether there’d been any thought of postponing Anthony Albanese’s state visit because of the Middle East conflict. </p>
<p>No, she said, highlighting the importance of alliances and reassuring that the president could handle more than one thing at a time. </p>
<p>From Albanese’s vantage point it’s extraordinary that, in the space of a fortnight, he’s breaking bread with the two most powerful men in the world, Biden and China’s Xi Jinping. </p>
<p>Of course, when an Australian prime minister is invited to Washington, he or she has to go. This trip, partly a consolation prize for Biden having to pull out the Quad meeting earlier this year, has been particularly important as Australia tries to push along the implementation of the AUKUS agreement.</p>
<p>But, domestically, the timing is not great for Albanese. As pictures came in of the glamorous black-tie White House state dinner (later overshadowed by another dreadful shooting in America), many Australian families were facing a fresh bout of anxiety about their mortgage payments. </p>
<p>Wednesday’s September-quarter figures, showing inflation is still uncomfortably high, set off speculation about whether the Reserve Bank will increase interest rates again, either after its meeting on Tuesday week, Melbourne Cup Day, or in December. </p>
<p>The bank is usually Delphic about its intentions, and new governor Michele Bullock is showing herself a master at that game. </p>
<p>In her first major speech as governor, delivered before the inflation figures, Bullock said the bank’s “focus remains on bringing inflation back to target within a reasonable timeframe, while keeping employment growing”.</p>
<p>It was possible this could be done without changing the cash rate, she said. But there were risks and the bank’s board “will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation”. The board would receive more information before its meeting that would be important for this assessment, she said. </p>
<p>She left similar uncertainty when she appeared before a Senate estimates hearing on Thursday, saying the inflation number “was pretty much where we thought it would come out”. As for whether it made a rate rise more or less likely, “I wouldn’t like to say more or less likely – we’re still looking at it.”</p>
<p>Bullock has her standing on the line with this decision. As her predecessor, Philip Lowe, found, misjudgments can bring both reputational damage and public odium for the bank’s governor, who is much more an exposed public figure these days. </p>
<p>Treasurer Jim Chalmers had multiple messages after the inflation number. The annual figure was in line with expectations, he said, but inflation was too high and would be so for too long. These figures didn’t take in the fallout from the Middle East conflict – that’s an unknown still to come. He emphasised (drawing on the Australian Bureau of Statistics data) that the government’s various measures (energy relief, child care and the like) are “taking some of the edge off these pressures that Australians are feeling”.</p>
<p>The point is, however, that whatever the government has done is for the average household only at the margin. </p>
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Read more:
<a href="https://theconversation.com/politics-with-michelle-grattan-treasurer-jim-chalmers-on-michele-bullocks-appointment-as-reserve-bank-governor-209793">Politics with Michelle Grattan: Treasurer Jim Chalmers on Michele Bullock's appointment as Reserve Bank Governor</a>
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<p>Many people have already moved from fixed low-interest loans to higher rate loans. But many are still facing that cliff. According to Reserve Bank data, about 520,000 loans are estimated to roll over in the second half of 2023 and another 450,000 loans will roll onto higher rates in 2024.</p>
<p>The government hopes Bullock will hold the line on rates in the next two months. A pre-Christmas rise would really put pressure on it. It mightn’t be responsible for the trouble but it rode to power promising to relieve cost-of-living pressures. Since then those pressures have become a great deal worse. </p>
<p>If this issue were to take a serious toll on Labor’s popularity over coming months, that would be likely to restrict the government’s scope to pursue its broader objectives. </p>
<p>Maybe Chalmers had this in mind when he spoke on Wednesday at the Political Book of the Year function (where the winner was Niki Savva for Bulldozed, her account of Scott Morrison’s demise). Chalmers reflected that the mood was rather more sombre than on the previous such occasion. </p>
<p>“Part of that, of course, is the recognition that people are under pressure, in some cases very serious pressure, we saw that again in today’s inflation numbers and addressing this challenge is our highest priority,” he told the audience.</p>
<p>“But also because, on top of this, we’ve had the Voice knocked back. There’s a new and escalating conflict in the Middle East, risking innocent lives and putting pressure on communities here at home. And we just lost one of the finest Australians, a wonderful Queenslander, Bill Hayden.”</p>
<p>Chalmers went on to observe that “political writing is writing about power”, and said: “The best speech delivered off the cuff in this room [at the National Press Club] was about power and purpose.</p>
<p>"When Paul Keating stood up here at the end of 1990, surrounded by journalists, he was mourning the loss of Chris Higgins [treasury secretary who had just died], and he spoke of our generational responsibilities to lead. Marrying-up power and purpose, in the service of something important.”</p>
<p>Chalmers recalled “the first time I met Paul, when interviewing him for my thesis. He gave me some free advice that went something like ‘why don’t you stop thinking about power and start exercising it?’”</p>
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Read more:
<a href="https://theconversation.com/as-treasurer-bill-hayden-set-labor-on-the-path-to-economic-rationalism-216150">As treasurer, Bill Hayden set Labor on the path to economic rationalism</a>
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<p>Both Hayden and Keating have been role models for Chalmers. As the final treasurer in the Whitlam government, Hayden pursued budgetary rigour (in his case in the most difficult circumstances). Keating was the driver (with PM Bob Hawke) of an impressive agenda of economic reforms. </p>
<p>These days the public appetite for change is not what it was in the 1980s, when Keating was pushing through his measures. If the cost-of-living crisis persists for a long time, the opportunity for reforms will be further constrained. The political cost, however, could extend well beyond that. </p>
<p>So far, the public haven’t turned their wrath onto the government. The cost-of-living dragon has wreaked its havoc on families. If it starts to consume the government’s support, it could eat a lot of political capital very quickly.</p><img src="https://counter.theconversation.com/content/216441/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>Wednesday’s September-quarter figures, showing inflation is still uncomfortably high, set off speculation about whether the Reserve Bank will increase interest rates againMichelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2158882023-10-25T04:33:04Z2023-10-25T04:33:04ZPetrol is holding up inflation – the 7 graphs that show what’s happening to prices and what it will mean for interest rates<figure><img src="https://images.theconversation.com/files/555746/original/file-20231025-25-gw57iy.png?ixlib=rb-1.1.0&rect=198%2C754%2C3071%2C1535&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Today’s figures from the Australian Bureau of Statistics show inflation <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/sep-quarter-2023">fell</a> in the September quarter for the third consecutive quarter. </p>
<p>But petrol prices kept it uncomfortably high.</p>
<p>After reaching a 30-year high of 7.8% at the end of 2022, annual inflation as measured by the quarterly index slid to 7% in the March quarter, fell further to 6% in the June quarter and has now slipped to 5.4% in the September quarter.</p>
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<p>These quarterly results are consistent with the more experimental <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/monthly-consumer-price-index-indicator/latest-release">monthly measure</a> which also shows annual inflation trending down since December.</p>
<p>On that measure annual inflation has been broadly falling since December, but has been climbing since it hit a low of 4.9% in July, hitting 5.6% in September largely in response to higher petrol prices and rents.</p>
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<p>Helping bring down inflation in the September quarter were falls in the price of fruit and vegetables. </p>
<p>The bureau said an unusually warm winter improved yields for salad vegetables such as tomatoes, capsicums and lettuce and increased the supply of berries.</p>
<p>But pushing it up were increases in the price of insurance (14.7% over the year to September), healthcare (5.4%) and petrol (7.9%).</p>
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<p>Holding inflation back were three budget measures Treasurer Jim Chalmers said had a combined effect of knocking 0.5 percentage points off inflation:</p>
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<li><p>measured electricity prices increased 4.2% in the September quarter. The bureau said without the rebates announced in the budget, the increase would have been 18.6%</p></li>
<li><p>measured childcare prices fell 13.2% in the quarter. The bureau said without the subsidies introduced in July they would have climbed 6.7%</p></li>
<li><p>measured rent increased 2.2% in the quarter. The bureau said without the increase in rent assistance announced in the May budget the increase would have been 2.5%. </p></li>
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<p>To get a better idea of what would be happening were it not for unusual and outsized moves, the bureau calculates what it calls a trimmed mean measure of “underlying inflation”.</p>
<p>This excludes the 15% of prices that climbed the most in the quarter (notably petrol) and the 15% of prices that climbed the least or fell. Watched closely by the Reserve Bank, it also shows inflation falling, and down to 5.2%.</p>
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<p>The fall in Australia’s inflation since 2022 is in line with falls in other Western nations including the United States, Canada and the United Kingdom. </p>
<p>Each has been brought about by an easing of supply bottlenecks and slowing economic activity in response to higher interest rates, and each has recently stalled in response to higher oil prices.</p>
<p>(In one nation not graphed – China – there has been almost no increase in prices over the past year, resulting in an inflation rate of <a href="https://tradingeconomics.com/china/inflation-cpi">near zero</a>.)</p>
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<p>Global oil prices climbed sharply in July after Saudi Arabia and Russia <a href="https://www.bbc.com/news/business-65804768">decided to cut production</a>, a year and a half after Russia invaded Ukraine, pushing up oil prices in February 2022.</p>
<p>In the words of the new Reserve Bank governor <a href="https://www.rba.gov.au/speeches/2023/sp-gov-2023-10-18-q-and-a-transcript.html">Michele Bullock</a>, the world keeps getting hit with “shock after shock after shock”. </p>
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<p>What happens from here on in Australia will depend not only on the global oil price, which is expressed in US dollars, but also on the US-Australian dollar exchange rate which has fallen 6% since July, pushing up the price of petrol in Australian dollars.</p>
<p>The good news, so far, is that since the end of September (since the period covered by the inflation figures released today) the price of petrol has <a href="https://theconversation.com/50-years-ago-when-the-middle-east-was-at-war-oil-prices-skyrocketed-but-it-probably-wont-happen-this-time-215523">eased</a>.</p>
<p>Where they go from here will largely depend on whether the Israel-Hamas conflict spreads to countries that produce oil.</p>
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<h2>What’s it mean for rates?</h2>
<p>Petrol prices aside, inflationary pressures appear to be easing in Australia. </p>
<p>The interest rate increases engineered by the Reserve Bank have slowed spending and have yet to have their full impact. </p>
<p>Although the decade-long decline in unemployment appears to have <a href="https://www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-force-australia/sep-2023">halted</a> there is no sign of an alarming <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/wage-price-index-australia/latest-release">wages break-out</a>. </p>
<p>In the minutes of its October board meeting the Reserve Bank indicated it would be examining today’s inflation numbers closely when it next meets on Melbourne Cup Day November 7, warning it had </p>
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<p>In her first speech as governor this week Michele Bullock reiterated that the board would “not hesitate to raise the cash rate further” if there was a material upward revision to the outlook for inflation.</p>
<p>Today, Treasurer Jim Chalmers said the view of his department was that the outlook for inflation had not materially changed.</p>
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Read more:
<a href="https://theconversation.com/no-hike-yet-but-what-happens-on-melbourne-cup-day-depends-on-petrol-214738">No hike yet, but what happens on Melbourne Cup Day depends on petrol</a>
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<p>The Bank will release its revised forecasts on November 10. The last lot, in August, <a href="https://www.rba.gov.au/publications/smp/2023/aug/economic-outlook.html">had inflation dropping</a> from 6% in June to a little over 4% in December. </p>
<p>While today’s result of 5.4% is a little bit above this trajectory, the underlying measure, 5.2% is almost on track. </p>
<p>This means while it may make the board members even more anxious, today’s inflation figure probably hasn’t made another interest rate rise more likely.</p>
<p>Of course, what the board does is up to it. It will decide in a fortnight.</p><img src="https://counter.theconversation.com/content/215888/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Hawkins is a former economic analyst and forecaster in the Reserve Bank and Australian Treasury.</span></em></p>Inflation has slipped from 6% to 5.4%, but the price of petrol climbed 7.2% in the September quarter. Much depends on what the RBA thinks will happen from here on.John Hawkins, Senior Lecturer, Canberra School of Politics, Economics and Society, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2147382023-10-03T05:19:13Z2023-10-03T05:19:13ZNo hike yet, but what happens on Melbourne Cup Day depends on petrol<p>If the Reserve Bank does push up interest rates again, the most likely next date is its next board meeting, on Melbourne Cup Tuesday.</p>
<p>The November 7 meeting is especially important because it is one of four each year in which the board has the full set of quarterly staff forecasts before it, as well as the latest detailed quarterly breakdown of inflation.</p>
<p>For the moment, in its first meeting with the new governor Michele Bullock in the chair, the board decided on Tuesday to keep rates on hold, pointing to “<a href="https://www.rba.gov.au/media-releases/2023/mr-23-25.html">uncertainty surrounding the economic outlook</a>”.</p>
<p>It’s uncertain about what’s happening to China’s economy; it’s uncertain about the lagged effect of the 12 increases to date; and it’s suddenly less certain about inflation.</p>
<p>When the board last met, the official figures showed inflation falling. Not now. And not only in Australia.</p>
<h2>Inflation has kicked back up</h2>
<p>After sliding throughout the Western world, inflation edged up in the US and Canada in July and August, and in Australia in August. </p>
<p>In the US, annual inflation plummeted from a peak of 9.1% to 3% before edging back up to <a href="https://tradingeconomics.com/united-states/inflation-cpi">3.7%</a>. </p>
<p>In Australia, the monthly measure of annual inflation dived from 8.4% to 4.9% before edging up to <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/monthly-consumer-price-index-indicator/latest-release#data-downloads">5.2%</a>.</p>
<p>This means inflation is moving further away from, rather than closer to, the Reserve Bank’s 2-3% target band. </p>
<p>The bank had been expecting it to keep falling to <a href="https://www.rba.gov.au/publications/smp/2023/aug/forecasts.html">4.1%</a> by the end of this year, then to fall further to 3.3% – within spitting distance of its target – by the end of next year.</p>
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<p>So what will Michele Bullock and her board do next time?</p>
<p>The first thing to consider (and they considered it in the first meeting under Michele Bullock on Tuesday) is what’s caused the uptick in inflation. </p>
<h2>Petrol is fuelling inflation</h2>
<p>Statistically, all of the uptick in inflation (yes, <em>all</em> of the uptick) was caused by an increase in one price – what the Bureau of Statistics calls automotive fuel, and what the rest of us call petrol and diesel.</p>
<p>Had that price not soared an astounding <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/monthly-consumer-price-index-indicator/latest-release">9.1%</a> in one single month, August, the inflation rate for August would have remained steady at 4.9%.</p>
<p>Absent automotive fuel, in recent months annual increases in the prices of food, clothes and electricity (yes, electricity) have fallen. In the last two months, the monthly increase in rents has inched down, suggesting that, as painful as high rent increases have been, they’ll eventually subside.</p>
<p>The second thing to consider is whether an uptick in inflation, resulting from an increase in the price of one commodity, is reason enough to return to pushing up interest rates.</p>
<h2>Suddenly, petrol’s $2.20 per litre or more</h2>
<p>Oil prices have shot up because in July one of the biggest producers, Saudi Arabia, began <a href="https://www.bbc.com/news/business-65804768">cutting production</a> in what its energy minister said was “a bid to stabilise” the market. </p>
<p><a href="https://www.reuters.com/business/energy/opec-cuts-tighten-oil-market-sharply-fourth-quarter-says-iea-2023-09-13/">Russia</a> has joined in. The result – bolstered by a much lower Australian dollar – has been soaring prices. We’ve even seen new records set in some places, including Brisbane’s record unleaded price of <a href="https://www.theguardian.com/australia-news/2023/sep/27/brisbane-faces-record-high-petrol-prices-as-sydney-and-melbourne-warned-of-looming-spikes">$2.38</a>. </p>
<p>Melbourne’s <em>average</em> price exceeded <a href="https://fuelprice.io/vic/melbourne/">$2.20</a> a few weeks back and is still above $2.10.</p>
<p>Last year, when rocketing petrol and diesel prices were part of a widespread surge in inflation after Russia invaded Ukraine (and Australia temporally <a href="https://theconversation.com/what-will-the-fuel-excise-cut-save-you-not-as-much-as-the-treasurer-says-180330">cut</a> fuel excise to wind them back), what the Reserve Bank should do was clear: push up interest rates to take the heat out of consumer spending.</p>
<p>But it’s different now. Rising inflation isn’t widespread, and spending per consumer is collapsing. </p>
<p>In August, retail spending grew just 0.2%, at a time of rapid population growth and still rapid price growth. Over the year to August, total retail spending climbed just 1.5% at a time when the population grew <a href="https://www.abs.gov.au/statistics/people/population/national-state-and-territory-population/mar-2023">2.2%</a> and prices climbed more than 5%.</p>
<p>It means we are winding back spending, big time. And here’s the thing about the latest increase in petrol prices: it will wind back spending on things other than petrol even further.</p>
<h2>Petrol could be fuelling ‘disinflation’</h2>
<p>AMP chief economist Shane Oliver thinks the latest petrol price rises could be disinflationary. That’s right, “<a href="https://www.amp.com.au/insights-hub/blog/investing/weekly-market-update-15-09-2023">disinflationary</a>”. </p>
<p>Just as a tax increase reduces the free money households have to spend and makes it harder for them to push up prices, an increase in the price of a purchase that’s near compulsory cuts the amount we have to spend on other things.</p>
<p>Offsetting this is the reality that petrol and diesel prices have risen. In time, those higher prices will feed through into higher prices for just about everything that is moved by trucks.</p>
<p>But the two – higher input prices and less price pressure from consumers – should to some extent offset each other, which is a reason for the Reserve Bank board to at least consider taking the latest uptick in inflation in its stride.</p>
<p>The <a href="https://www.rba.gov.au/media-releases/2023/mr-23-25.html">announcement</a> after Tuesday’s meeting postponed this consideration. By deciding to hold rates steady, the board said it could take “further time to assess the impact of the increase in interest rates to date and the economic outlook”.</p>
<p>The Reserve Bank board’s view about whether to treat what’s happening to petrol as inflationary or disinflationary (or neutral) will play an outsized role in the decision it makes about interest rates on November 7.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/australia-is-on-the-brink-of-ending-interest-rate-hikes-and-an-economic-first-beating-inflation-without-a-recession-209877">Australia is on the brink of ending interest rate hikes and an economic first – beating inflation without a recession</a>
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<img src="https://counter.theconversation.com/content/214738/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>Petrol prices have pushed inflation up. At its next meeting, the Reserve Bank board is going to have to decide if that warrants an increase in interest rates.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2143572023-09-26T06:09:08Z2023-09-26T06:09:08ZThe Albanese government blew its shot at setting a historic new unemployment target<figure><img src="https://images.theconversation.com/files/550177/original/file-20230926-15-aybg8t.png?ixlib=rb-1.1.0&rect=838%2C362%2C3477%2C1920&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>Treasurer Jim Chalmers says the federal government’s employment white paper is “<a href="https://ministers.treasury.gov.au/ministers/jim-chalmers-2022/media-releases/working-future-white-paper-jobs-and-opportunities">ambitious</a>”. I’m not convinced.</p>
<p>A clearly ambitious statement would have specified a target for unemployment, ideally one that was a bit of a stretch.</p>
<p>The Keating Labor government’s <a href="https://theconversation.com/1-in-5-australian-workers-are-either-underemployed-or-out-of-work-white-paper-210967">Working Nation</a> statement did that in 1994. Released at a time when unemployment was almost 10%, it specified a target unemployment rate of <a href="https://images.theconversation.com/files/550136/original/file-20230925-26-rz0hz2.PNG">5%</a> – an ambition that served as a beacon for decades.</p>
<p>That target certainly needs to be updated. Unemployment is now well below 5%, meaning “full employment” is now much less than 5%. Yet the Albanese government has passed up a historic opportunity to say how much less, which it could have done by setting its own target.</p>
<h2>Setting our sights below 5%</h2>
<p>The <a href="https://treasury.gov.au/employment-whitepaper/final-report">white paper</a> released <a href="https://theconversation.com/1-in-5-australian-workers-is-either-underemployed-or-out-of-work-white-paper-210967">on Monday</a> defines full employment as a state in which “everyone who wants a job should be able to find one without searching for too long”. That means our unemployment target ought to be somewhere between zero and 5%. </p>
<p>Of course, the unemployment rate can never be zero. </p>
<p>There will always be people out of work while they are moving between jobs, what the white paper calls “frictional” unemployment. That will also be true when Australia’s mix of employers changes – what the paper calls “structural” unemployment, as new industries requiring one sort of training replace old industries that required another.</p>
<p>The white paper says what matters in addition to unemployment (539,700 Australians) is “underemployment” in which people work fewer hours than they want (1 million) and “potential workers” who would like work but aren’t actively looking and so aren’t counted as unemployed (1.3 million). </p>
<p>I get that these things matter. I get that we need, in the words of the white paper, “a higher level of ambition than is implied by statistical measures”. </p>
<h2>What gets measured gets done</h2>
<p>But that higher level of ambition ought not replace targets.</p>
<p>If a target isn’t specific, it isn’t a target at all (or at best it’s a fuzzy target). That means it’s less likely to be aimed at and less likely to be hit.</p>
<p>That’s how it’s been with full employment itself. In 1996 Treasurer Peter Costello and the man he appointed Reserve Bank governor, Ian Macfarlane, signed what became the first <a href="https://www.rba.gov.au/publications/bulletin/1996/sep/pdf/bu-0996-1.pdf">Statement on the Conduct of Monetary Policy</a>, an agreement that’s been updated <a href="https://www.rba.gov.au/monetary-policy/framework/">six times</a>.</p>
<p>As with all of the agreements since, that first statement set out an inflation target (“between 2% and 3%, on average, over the cycle”) but <em>not</em> an employment target – even though both are meant to be objectives under the <a href="https://www.rba.gov.au/about-rba/our-role.html">Reserve Bank Act</a>.</p>
<p>As a result, Governor Macfarlane was able to step down ten years later, secure in the knowledge that on average he had hit the middle of the target band: 2.5% inflation. His successor Glenn Stevens stepped down ten years further on, <a href="https://www.rba.gov.au/speeches/2016/sp-gov-2016-08-10.html">quietly boasting</a> the same thing.</p>
<p>But neither could make any boast about hitting the employment target – because there wasn’t one. </p>
<h2>How failing to set a target costs jobs</h2>
<p>The governor who has just retired, Philip Lowe, looks like he’ll hit an inflation average of 2.8%, which is pretty low given how high inflation has been lately.</p>
<p>But an estimate by former Reserve Bank staffer Isaac Gross, prepared using the Reserve Bank’s own economic model, suggests that in doing so he kept unemployment a good deal higher than it needed to be between 2016 and 2019 – the equivalent of <a href="https://theconversation.com/the-rbas-failure-to-cut-rates-faster-may-have-cost-270-000-jobs-185381">270,000</a> people being out of work for one year.</p>
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<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>
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<p>Lowe wasn’t held to account for the extra unemployed in the same way as he is being <a href="https://www.afr.com/policy/economy/don-t-judge-phil-lowe-s-inflation-fighting-legacy-yet-20230912-p5e3x6">held to account</a> for his performance on inflation. Why? Because he was never actually given an unemployment target.</p>
<p>I am quite prepared to acknowledge that other measures of employment matter, underemployment among them. But here’s the thing: they move in line with unemployment. </p>
<p>When Australia’s unemployment rate falls, Australia’s underemployment rate falls, almost in tandem. </p>
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<p>It’s easy to see why. As employers find it hard to hire new workers, they get existing workers to put in more hours. And retirees and others who haven’t been looking for work begin putting themselves out there. </p>
<p>Australia’s <a href="https://www.investopedia.com/terms/p/participationrate.asp">participation rate</a> measures the proportion of the population making itself available for work. As unemployment has fallen, it has climbed to an <a href="https://tradingeconomics.com/australia/labor-force-participation-rate">all-time high</a>. </p>
<h2>Our unemployment rate is a proxy for what matters</h2>
<p>This makes the unemployment rate just about the perfect proxy for everything else about the labour market that matters, and just about the perfect number to target.</p>
<p>The Albanese government could have recognised that this week – setting a stretch target of 3% (or even 4%) as an aspiration. Even that would have been less “ambitious” than Keating choosing 5%, when the rate was twice as high.</p>
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<span class="attribution"><a class="source" href="https://rbareview.gov.au/">2023 RBA Review</a></span>
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<p>Treasurer Chalmers says the government didn’t set a target because apparently the unemployment rate <a href="https://treasury.gov.au/sites/default/files/2023-09/p2023-447996-04-ch2.pdf">doesn’t capture</a> “the full extent of spare capacity in our economy or the full potential of our workforce”.</p>
<p>The saving grace is this government has a second chance at this. Chalmers is about to update the Reserve Bank’s statement of expectations, the one that until now hasn’t included a target for unemployment.</p>
<p>It would be open to him to put a specific target in there – making the RBA as accountable as it is now on inflation.</p>
<p>At the moment, it looks more likely Chalmers will adopt a recommendation of the <a href="https://theconversation.com/no-the-rba-review-wont-mean-handing-the-banks-decisions-to-part-time-outsiders-214030">independent review</a> of the bank, which reported in March.</p>
<p>That review recommended the bank be <a href="https://rbareview.gov.au/sites/rbareview.gov.au/files/2023-06/rbareview-report-at_0.pdf">required</a> to produce its own “best assessment of full employment at any point time”, including its estimate of the lowest rate of unemployment that can be sustained without accelerating inflation.</p>
<p>It would be a small step forward. That full employment estimate would become a number to watch, in the same way as the bank’s performance on inflation is at the moment. </p>
<p>But it still won’t be an official government target. The Albanese government had an opportunity to live up to its ambitious rhetoric – and it passed.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/1-in-5-australian-workers-is-either-underemployed-or-out-of-work-white-paper-210967">1 in 5 Australian workers is either underemployed or out of work: white paper</a>
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<img src="https://counter.theconversation.com/content/214357/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>30 years ago, Labor Prime Minister Paul Keating adopted an ambitious official target for Australian unemployment. The Albanese government just passed up a historic opportunity to go even further.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2142292023-09-24T12:31:05Z2023-09-24T12:31:05ZEmployment white paper to deliver more highly qualified workers in net zero, care and digitisation<p>The government will commit $41 million for technical and further education and “higher apprenticeships” when it releases its <a href="https://treasury.gov.au/review/employment-whitepaper">white paper on employment</a> on Monday. </p>
<p>Of this, $31 million will be for new TAFE “centres of excellence” and $10 million will be to develop higher and degree apprenticeships in the priority areas of care, net zero emissions, and digitisation. </p>
<p>Treasurer Jim Chalmers said on Sunday the white paper will sketch out 31 future reform directions and contain nine new policies. Its emphasis would be on action. </p>
<p>The extra funding will fast track up to six new centres of excellence under the five-year national skills agreement presently being negotiated. The new centres will be upgrades of existing TAFEs and will establish a co-ordinated national network of institutions that help address the economic challenges facing Australia in the transformation to cleaner energy, the care economy and digitisation. </p>
<p>“The intention is to create new degree apprenticeship qualifications and enable TAFEs to deliver new bachelor equivalent higher apprenticeships independent of universities, giving them capacity to provide students with opportunities to gain the advanced skills needed by industries,” Chalmers and education and skills ministers Jason Clare and Brendan O'Connor said in a statement.</p>
<p>“The government is aiming to double higher apprenticeship commencements in the priority areas identified in the white paper over five years.</p>
<p>"These reforms will mean that apprentices can get degree-level qualifications and university students can more easily get practical training and skills.”</p>
<p>Chalmers said the expansion of TAFE offerings would produce</p>
<blockquote>
<p>more graduates with more of the skills they’ll need to make the most of the big shifts that are shaping our economy into the future – whether it’s the net zero transformation, growth in the care economy or adapting and adopting new technology.</p>
</blockquote>
<p>The white paper, prepared by Treasury, will set out five objectives: </p>
<ul>
<li><p>delivering sustained and inclusive full employment</p></li>
<li><p>promoting job security and strong, sustainable wage growth</p></li>
<li><p>reigniting productivity growth</p></li>
<li><p>filling skills needs and building the future workforce</p></li>
<li><p>overcoming barriers to employment and broadening opportunities.</p></li>
</ul>
<p>Its initiatives will cover ten areas: strengthening economic foundations; modernising industry and regional policy; planning for the future workforce; broadening access to foundation skills; investing in skills, tertiary education and lifelong learning; reforming the migration system; building capabilities through employment services; reducing barriers to work; partnering with communities; and promoting inclusive, dynamic workplaces. </p>
<p>Centrally, the paper will outline the government’s definition of full employment. It has avoided putting a number on it, instead saying it will be achieved when “everyone who wants a job should be able to find one without searching for too long”. </p>
<p>The paper will say discussions of full employment have often too narrowly centred around statistical estimates of the non-accelerating inflation rate of unemployment or NAIRU </p>
<blockquote>
<p>which do not capture the full extent of spare capacity in our economy or the full potential of our workforce. The NAIRU should not be confused with, nor constrain, longer-term policy objectives.</p>
</blockquote>
<p>The government has “broader and bolder aspirations for full employment, aimed at increasing the maximum level of employment we can sustain over time, by reducing structural underutilisation”.</p>
<p>Chalmers on Sunday played down suggested differences between the white paper’s definition of full employment and the Reserve Bank’s calculation of NAIRU, saying it was important not to try to find differences where they did not exist. </p>
<p>The targets in the white paper should be seen as complementary to, but “not in conflict with” the Reserve Bank’s targets. </p>
<p>The paper will say there are at present 2.8 million people wanting work they don’t have or hours they don’t have – equivalent to one fifth of the current workforce.</p><img src="https://counter.theconversation.com/content/214229/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>Monday’s white paper will define fuill employment more broadly than in the past as when “everyone who wants a job should be able to find one without searching for too long”.Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2140302023-09-22T03:29:49Z2023-09-22T03:29:49ZNo, the RBA review won’t mean handing the bank’s decisions to part-time outsiders<p>Misinformation is circulating about recommendations concerning the Reserve Bank board made by the <a href="https://rbareview.gov.au/about">RBA Review</a>, of which I was a member.</p>
<p>Among the claims are that the new monetary policy board we have proposed would “<a href="https://www.afr.com/policy/economy/bullock-s-interest-rate-powers-weakened-ex-rba-boss-says-20230920-p5e69o">weaken</a>” incoming governor Michele Bullock’s power over interest rates, and that giving part-time appointees majority control over important decisions would be a “<a href="https://www.afr.com/policy/economy/the-reserve-bank-board-restructure-is-a-dangerous-mistake-20230920-p5e66n">dangerous mistake</a>”.</p>
<p>The claims need to be corrected.</p>
<p>The <a href="https://rbareview.gov.au/about">Review of the Reserve Bank of Australia</a>, conducted between July 2022 and March 2023, made <a href="https://rbareview.gov.au/sites/rbareview.gov.au/files/2023-06/rbareview-report-at_0.pdf">51 recommendations</a>, which Treasurer Jim Chalmers is now considering.</p>
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<span class="attribution"><a class="source" href="https://rbareview.gov.au/">2023 RBA Review</a></span>
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<p>The review consulted 137 people, including 27 current or past board members, conducted 224 meetings, surveyed 1,100 people, received 117 submissions, and met with 31 community, labour, business and industry groups and 14 former and current politicians.</p>
<p>We recommended that interest rate and other monetary policy decisions by the Reserve Bank be undertaken by an <a href="https://images.theconversation.com/files/549685/original/file-20230921-21-ttpdja.png">expert</a> board with diverse perspectives and knowledge. </p>
<p>This board would be responsible only for monetary policy decisions and oversight of the bank’s contribution to financial system stability. Governance would be taken care of by a separate corporate governance board. </p>
<p>Our recommendations would not involve handing power to outsiders, as some commentators have claimed. In fact, the changes don’t deviate too much from what is already in the legislation. Here’s why.</p>
<h2>Board composition</h2>
<p>The Reserve Bank board consists of nine members: the Reserve Bank governor, deputy governor, secretary to the Treasury, and six external members who serve part-time.</p>
<p>Our recommended monetary policy board would have exactly the same composition. </p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/rba-revolution-how-chalmers-will-recraft-the-bank-for-the-21st-century-204139">RBA revolution: how Chalmers will recraft the bank for the 21st century</a>
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<h2>Board responsibilities</h2>
<p>Former Reserve Bank governor Ian Macfarlane <a href="https://www.afr.com/policy/economy/bullock-s-interest-rate-powers-weakened-ex-rba-boss-says-20230920-p5e69o">told the Australian Financial Review</a> the existing board has traditionally acted more like an “advisory” committee and less like a voting board, allowing the governor and bank insiders to retain control of monetary policy.</p>
<p>Yet just-departed governor Philip Lowe said earlier this month that the proposed model is “<a href="https://www.rba.gov.au/speeches/2023/sp-gov-2023-09-07-q-and-a-transcript.html">exactly</a>” the same as the model the Reserve Bank has had for 60 years.</p>
<p>As Lowe put it:</p>
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<p>it has never been the case that the governor just comes with a recommendation and just forces it through, the decisions are genuinely taken by nine people together, and we discuss issues from every angle.</p>
</blockquote>
<p>Both views were what we heard in our consultations.</p>
<p>Voting is specified by the <a href="https://www.legislation.gov.au/Details/C2015C00201">Reserve Bank Act</a>. It requires that questions arising at board meetings be “decided by a majority of the votes of the members present and voting”.</p>
<p>Our recommendations don’t change that. What they do is better enable the external members to deliver responsible monetary policy, by ensuring they have expertise in things such as macroeconomics, the financial system and labour markets.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/549708/original/file-20230922-17-hmf78l.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/549708/original/file-20230922-17-hmf78l.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/549708/original/file-20230922-17-hmf78l.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=964&fit=crop&dpr=1 600w, https://images.theconversation.com/files/549708/original/file-20230922-17-hmf78l.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=964&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/549708/original/file-20230922-17-hmf78l.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=964&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/549708/original/file-20230922-17-hmf78l.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1212&fit=crop&dpr=1 754w, https://images.theconversation.com/files/549708/original/file-20230922-17-hmf78l.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1212&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/549708/original/file-20230922-17-hmf78l.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1212&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">Board members would have a mix of skills.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
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<p>We believe this mix of skills will be necessary amid the challenges and uncertainty Australia is likely to face in the future. </p>
<p>We expect more economic disruption from events such as the war in Ukraine, pandemics and climate events. Meanwhile, the rise of factors such as gig work and artificial intelligence will bring changes in the labour market. </p>
<p>We recommended that each external member of the monetary policy board be given direct access to Reserve Bank staff. These staff could provide extra analysis or briefings on the costs, benefits and risks of various possible strategies.</p>
<h2>Board appointments</h2>
<p>Currently, the treasurer appoints Reserve Bank board members from a “<a href="https://www.rba.gov.au/monetary-policy/framework/stmt-conduct-mp-7-2016-09-19.html">register of eminent candidates of the highest integrity</a>” maintained by the treasury secretary and Reserve Bank governor. </p>
<p>The existing members are doubtless outstanding leaders in their fields. But our review could not identify the criteria used to determine who is added to the register.</p>
<p>We recommended a transparent and strategic appointment process. </p>
<p>Advertisements would be posted asking for expressions of interest, pointing to a set of required skills and experience. A panel comprising the treasury secretary, the governor and a third party would then prepare a shortlist for the treasurer.</p>
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<a href="https://images.theconversation.com/files/549710/original/file-20230922-27-k2kzjq.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/549710/original/file-20230922-27-k2kzjq.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/549710/original/file-20230922-27-k2kzjq.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/549710/original/file-20230922-27-k2kzjq.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/549710/original/file-20230922-27-k2kzjq.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/549710/original/file-20230922-27-k2kzjq.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/549710/original/file-20230922-27-k2kzjq.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/549710/original/file-20230922-27-k2kzjq.png?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"></a>
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<span class="caption">Advertisements would call for expressions of interest.</span>
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<p>We recommended the external members be appointed for a term of five years with a potential one-year extension. End dates would be staggered, ensuring the entire board could not be replaced within a single term of government.</p>
<h2>A board of academics?</h2>
<p>Despite claims that our review “<a href="https://www.afr.com/policy/economy/former-governor-ian-macfarlane-what-s-wrong-with-the-rba-review-20230501-p5d4ld">envisages a committee of academic economists</a>”, the review defined expertise broadly. It said that although the change would “very likely mean more academic expertise” on the board, other experts were likely to include business leaders and professional economists.</p>
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<a href="https://images.theconversation.com/files/549712/original/file-20230922-26-sixnn0.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/549712/original/file-20230922-26-sixnn0.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/549712/original/file-20230922-26-sixnn0.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=965&fit=crop&dpr=1 600w, https://images.theconversation.com/files/549712/original/file-20230922-26-sixnn0.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=965&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/549712/original/file-20230922-26-sixnn0.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=965&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/549712/original/file-20230922-26-sixnn0.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1213&fit=crop&dpr=1 754w, https://images.theconversation.com/files/549712/original/file-20230922-26-sixnn0.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1213&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/549712/original/file-20230922-26-sixnn0.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1213&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Michele Bullock can hold her own.</span>
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<h2>Governor outnumbered?</h2>
<p>Macfarlane expressed concern that our recommendations would leave the governor “<a href="https://www.afr.com/policy/economy/bullock-s-interest-rate-powers-weakened-ex-rba-boss-says-20230920-p5e69o">outnumbered</a>” by six part-timers, meaning she would have to defend decisions she disagreed with.</p>
<p>Notwithstanding the fact the board’s composition wouldn’t change from its current makeup, we don’t have to worry about the governor. </p>
<p>I am confident Michele Bullock has what it takes to navigate a tough board and the associated public commentary, as does any strong leader. </p>
<p>Australians need to be sure the very best decisions are being made. Our future depends on it.</p>
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Read more:
<a href="https://theconversation.com/politics-with-michelle-grattan-treasurer-jim-chalmers-on-michele-bullocks-appointment-as-reserve-bank-governor-209793">Politics with Michelle Grattan: Treasurer Jim Chalmers on Michele Bullock's appointment as Reserve Bank Governor</a>
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<img src="https://counter.theconversation.com/content/214030/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Renee Fry-McKibbin has received funding from the Australian Research Council for research on the Australian macroeconomy and a per diem for her work on the Review. </span></em></p>Complaints that our recommendations would weaken the Reserve Bank governor ignore the fact that outsiders already control the board. We just want them do it better.Renee McKibbin, Professor of Economics, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2126422023-09-06T06:15:02Z2023-09-06T06:15:02ZPer capita recession as Chalmers says GDP ‘steady in the face of pressure’<p>Australia’s economy grew a mere <a href="https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-national-income-expenditure-and-product/jun-2023">0.4%</a> in the June quarter according to figures released by the Bureau of Statistics on Wednesday, a performance Treasurer Jim Chalmers describes as “steady in the face of unrelenting pressure”.</p>
<p>The lacklustre growth follows growth of 0.4% the previous quarter, and is a step down from the growth of 0.7% in the quarters that preceded it, presenting a stark reminder of the economic challenges caused by rising interest rates as the Reserve Bank attempts to reign in inflation.</p>
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<p>If growth continued at that pace for another two quarters, the annual growth rate would barely reach 1.6%, an alarmingly low figure that. For many Australians it probably feels like a recession, because all of the growth was accounted for by population growth, meaning gross domestic product (GDP) per person fell by 0.3% in both March and the June quarters, in a so-called “<a href="https://www.amp.com.au/content/dam/amp-au/documents/insights/recession-risk-oi-16-2023v2.pdf">per capita recession</a>”.</p>
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<p>The driving force behind this tepid growth is primarily weak household consumption which grew by only 0.1% in the quarter – far less than Australia’s population. </p>
<p>Households, grappling with the increased cost of essential expenses such as fuel and rent, have resorted to cutting down on savings. </p>
<p>In the three months to June Australia’s household saving ratio plummeted to 3.2%, its lowest rate in 15 years.</p>
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<p>How is it possible to have both weak spending and weak saving at the same time? </p>
<p>The answer is that disposable (post tax) income fell by even more. </p>
<p>Real per capita disposable income fell by 2.1% in the June quarter. </p>
<p>Outside of pandemic lockdown years of 2020 and 2021, this was the biggest fall in disposable income per Australian since the 2009 global financial crisis.</p>
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<p>The Bureau of Statistics says mortgage interest expenses have almost doubled over the past year as home building (“dwelling investment”) has slid by 0.2% in the quarter and 1.1% over the year. </p>
<p>In better news, business investment has shown resilience, climbing 0.6% in the quarter, and 3.4% over the year driven, driven in part by a <a href="https://www.afr.com/policy/economy/investment-jumps-as-tradies-rush-on-ute-tax-break-20230831-p5e0z1">rush of tradies</a> attempting to upgrade their cars before a cut in the instant asset write-off limit came into effect on July 1.</p>
<p>Exports climbed 4.3% in the quarter, driven by “education exports” as international students returned.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/you-dont-have-to-be-an-economist-to-know-australia-is-in-a-cost-of-living-crisis-what-are-the-signs-and-what-needs-to-change-210373">You don't have to be an economist to know Australia is in a cost of living crisis. What are the signs and what needs to change?</a>
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<p>Gross operating surpluses, a measure of company profits, fell by 8.6% in the quarter driven by a fall in commodity prices which drove down mining profits.</p>
<p>Pressing on profits were higher wage bills – which surged 9.9% outside of mining, reflecting both wage growth and employment growth, outstripping the 5.1% uptick in non-mining profits.</p>
<p>Lower commodity prices also drove another decline in Australia’s terms of trade which fell by 7.9%. The terms of trade measure the price of Australian’s exports relative to the price of imports, meaning that Australia is getting fewer imports for its exports – something that will inevitably feed into our standard of living.</p>
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<p>This subdued economic growth is the primary reason the Reserve Bank decided to hold interest rates <a href="https://www.rba.gov.au/media-releases/2023/mr-23-23.html">constant</a> at its board meeting yesterday. </p>
<p>The bank is expecting economic growth to decelerate to an annual rate of only <a href="https://www.rba.gov.au/publications/smp/2023/aug/pdf/forecast-table-2023-08.pdf">0.9%</a> by the end of the year, in large measure because of the series of 12 interest rate rises it has imposed since May last year.</p>
<p>One of the bank’s biggest concerns, and one of the government’s biggest concerns, is labour productivity (GDP per hour worked) which slid a further 2% in the quarter to be down <a href="https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-national-income-expenditure-and-product/jun-2023">3.6%</a> over the year. </p>
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<p>The bank’s outgoing governor Philip Lowe says falling or weak productivity growth makes wage increases more likely to feed inflation, limiting his freedom to cut interest rates, a point he might address in his final speech as governor on Thursday, to be entitled <a href="https://rba.livecrowdevents.tv/SpeechbyPhilipLoweGovernorAnikaFoundation7sept">Some Closing Remarks</a>.</p>
<p>Boosting productivity – how much we produce for each hour we work – is important. Our standard of living and the pain we need to inflict to fight inflation will depend on it.</p><img src="https://counter.theconversation.com/content/212642/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>Six charts explain the Australian economy. Three of the most disturbing show living standards going backwards, productivity collapsing and household saving falling to a 15-year low.Isaac Gross, Lecturer in Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2127802023-09-05T05:12:29Z2023-09-05T05:12:29ZWhat’s to stop Philip Lowe moving to a private bank after he leaves the RBA? It’s what his predecessors did<p>Surely Reserve Bank Governor Philip Lowe won’t move to a private bank after his term as governor ends next week.</p>
<p>After having chaired his last <a href="https://www.rba.gov.au/">board meeting</a> on Tuesday, there’s nothing to stop him, and – as shabby as it seems – he wouldn’t be the first.</p>
<p>There are three reasons why he shouldn’t join the board of or become chair of a private bank, all alluded to in the <a href="https://www.apsc.gov.au/publication/aps-values-and-code-conduct-practice/section-5-conflict-interest">public service code of conduct</a>.</p>
<p>One is concern that the former employee would reveal confidential Commonwealth information (which would be unlikely for someone as cluey as Lowe) or “provide other information that would give the new employer an advantage in its business dealings”, which would be more likely, even if unintentional.</p>
<p>Banks don’t seek out former Reserve Bank chiefs unless they think there’s something in it for them.</p>
<p>Another concern set out in the code of conduct is that the former employee would exploit their knowledge of the Commonwealth to lobby, or otherwise seek advantage for their new employer in dealing with the Commonwealth.</p>
<p>Banks such as Westpac, NAB, the ANZ and Macquarie Bank deal with the Reserve Bank all the time. It runs the payments system, it is responsible for the financial system, and it sets interest rates.</p>
<p>Every one of the four banks I just mentioned has employed either a former Reserve Bank Governor or Treasury Secretary.</p>
<h2>Perceptions matter when a Governor moves on</h2>
<p>Even where these high-profile hires don’t help the banks in their relations with the regulator, the public service code of conduct points to the “perception” that they will have a greater ability to influence regulators than other hires.</p>
<p>The third concern identified in the code of conduct – in my view the most important – has been labelled “<a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/1467-8500.12466">ingratiation</a>” by a public service specialist at the Australian National University, Richard Mulligan. </p>
<p>It’s the possibility that <em>while still in the public service</em>, the employee will use their position to go soft on an organisation (or type of organisation) they see as a potential future employer.</p>
<p>The Reserve Bank’s own <a href="https://www.rba.gov.au/about-rba/our-policies/code-conduct-rba-staff.html">code of conduct</a> is silent on the question of taking up employment with the banks it regulates, although it does say that where there is a perception of conflict of interest, the employee has to discuss it with the relevant department head or governor.</p>
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<em>
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Read more:
<a href="https://theconversation.com/the-rba-has-kept-interest-rates-on-hold-itll-be-cautious-from-here-on-208917">The RBA has kept interest rates on hold. It'll be cautious from here on</a>
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<p>The government’s <a href="https://www.ag.gov.au/integrity/publications/lobbying-code-conduct">lobbying code of conduct</a> in place since 2008 purports to ban heads of department from engaging in lobbying activities relating to any matter with which they have had official dealings for 12 months after they have left office.</p>
<p>But former governors needn’t lobby, and 12 months isn’t long to wait.</p>
<p>Philip Lowe’s predecessor, the man to whom he was deputy, <a href="https://www.macquarie.com/au/en/about/news/2021/glenn-stevens-appointed-next-chair-of-macquarie-group-and-macquarie-bank-following-peter-warne-retirement,-diane-grady-announces-her-intention-to-retire.html">Glenn Stevens</a>, finished up as Reserve Bank Governor in September 2016 and joined the board of the Macquarie Bank and Macquarie Group in December 2017. He has been chair of Macquarie Bank and Macquarie Group since 2022.</p>
<p>Stevens’ predecessor as governor, <a href="https://www.anz.com/content/dam/anzcom/shareholder/2007-Annual-Report.pdf">Ian Macfarlane</a>, finished as head of the Reserve Bank in September 2006 and joined the board of the ANZ bank in February 2007.</p>
<p>The governor he replaced, <a href="https://www.anz.com/content/dam/anzcom/shareholder/2007-Annual-Report.pdf">Bernie Fraser</a>, finished at the Reserve Bank in September 1996 and joined the board of the industry funds that became Australian Super in the same year, becoming chair of the super-fund-owned <a href="https://www.industrymoves.com/moves/fraser-steps-down-as-me-bank-chair">ME Bank</a> in 2000.</p>
<p><a href="https://web.archive.org/web/20151103062911/https://www.nab.com.au/about-us/our-business-at-a-glance/board-of-directors/kenneth-r-henry-ac">Ken Henry</a> stepped down as head of the Australian Treasury (and a member of the Reserve Bank board) in April 2011 and in November that year joined the board of the National Australia Bank. In 2015 he was made its chair.</p>
<p>The man Henry replaced at the Treasury, <a href="https://www.moneymanagement.com.au/news/financial-planning/westpacs-evans-retire">Ted Evans</a>, stepped down in April 2001 and joined the board of Westpac that year, becoming its chair in 2007.</p>
<p>I’ve dealt with each of these people while they were governors or treasury secretaries and I’ve never seen anything that made me doubt their integrity.</p>
<p>And yet in my view, none of them should have gone on to work for the type of organisations they used to regulate.</p>
<p>All of them were paid extraordinarily well. In 2021–22 Philip Lowe was on a package of <a href="https://www.rba.gov.au/publications/annual-reports/rba/2022/pdf/our-people.pdf">$1.037 million</a> including superannuation and a salary of $890,252.</p>
<p>None needed another high-paying job straight away, and (because of public service super) all had a generous income to look forward to in retirement.</p>
<p>I understand their need to continue to do interesting things, but I don’t think it’s too big a sacrifice to ask former regulators to do those things away from the types of organisations they had the privilege of regulating.</p>
<p>On retiring from the Reserve Bank in 1968, its first governor <a href="https://www.science.org.au/fellowship/fellows/biographical-memoirs/herbert-cole-coombs-1906-1997#anu">HC Coombs</a>, chaired the Council for the Arts and the Council for Aboriginal Affairs. He made an ever-greater contribution to Australia without doing what the Japanese call <a href="https://www.investopedia.com/terms/a/amakudari.asp">amakudari</a>, or “descending from heaven” to work for the organisations he once regulated. </p>
<p>A profile of the practice includes the admonition “<a href="https://thediplomat.com/2011/05/the-problem-with-amakudari/">don’t snicker</a>”.</p>
<p>When Lowe took the governor’s job in 2016 I wrote a <a href="https://www.smh.com.au/business/the-economy/meet-guy-debelle-and-philip-lowe-the-odd-couple-wholl-be-running-the-reserve-bank-20160916-grho4t.html">profile of him</a> for The Age and the Sydney Morning Herald, speaking to former teachers and colleagues off the record. Repeatedly, unprompted, they mentioned his moral compass.</p>
<p>Lowe is about to turn 62. He has years of useful work ahead of him. I don’t expect him to descend from heaven to do it.</p><img src="https://counter.theconversation.com/content/212780/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>Former Reserve Bank and Treasury chiefs have gone on to run Westpac, the National Australia Bank, the ANZ, and Macquarie Bank. It makes regulating those banks hard.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2112772023-08-13T02:53:30Z2023-08-13T02:53:30ZWe can and should keep unemployment below 4%, say top economists<figure><img src="https://images.theconversation.com/files/542107/original/file-20230810-27-i6hwim.png?ixlib=rb-1.1.0&rect=60%2C209%2C1819%2C764&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 leading economists believe Australia can sustain an unemployment rate as low as 3.75% – much lower than the latest Reserve Bank estimate of <a href="https://www.rba.gov.au/speeches/2023/sp-dg-2023-06-20.html">4.25%</a> and the Treasury’s latest estimate of <a href="https://treasury.gov.au/sites/default/files/2023-05/drkennedy-abeaddress-230518.pdf">4.5%</a>. </p>
<p>This finding, in an Economic Society of Australia poll of 51 leading economists selected by their peers, comes ahead of next month’s release of a government <a href="https://treasury.gov.au/review/employment-whitepaper/tor">employment white paper</a>, and an expected direction from Treasurer Jim Chalmers that the Reserve Bank <a href="https://theconversation.com/australia-is-about-to-set-its-first-full-employment-target-and-it-will-define-peoples-lives-for-decades-210783">quantify</a> its official employment target.</p>
<p>Asked what unemployment rate was most consistent with “full employment” under present policy settings, the 46 respondents who were prepared to pick a number or range picked an average rate of 3.75%.</p>
<p>The median (middle) response was higher, but still below official estimates – an unemployment rate of 4%.</p>
<hr>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/542047/original/file-20230810-15-6yzq9l.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/542047/original/file-20230810-15-6yzq9l.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=601&fit=crop&dpr=1 600w, https://images.theconversation.com/files/542047/original/file-20230810-15-6yzq9l.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=601&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/542047/original/file-20230810-15-6yzq9l.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=601&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/542047/original/file-20230810-15-6yzq9l.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=755&fit=crop&dpr=1 754w, https://images.theconversation.com/files/542047/original/file-20230810-15-6yzq9l.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=755&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/542047/original/file-20230810-15-6yzq9l.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=755&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p>Significantly, only two of the economists surveyed picked an unemployment rate of 5% or higher, which is where Australia’s unemployment rate has been for most of the past five decades.</p>
<p>The 3.75% average implies either that the Reserve Bank and government have lacked ambition on employment for much of the past half-century, or that the sustainable unemployment rate has fallen.</p>
<p>Australia’s unemployment rate dived to 3.5% in mid-2022 and has remained close to that long-term low since.</p>
<p>The survey result suggests the government can lock in the present historic low and need not – and should not – allow unemployment to climb too far from its present rate.</p>
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<p>Many of the experts surveyed questioned the idea of a “magic number” or non-accelerating inflation rate of unemployment (NAIRU) used by the Treasury and the Reserve Bank as a guide to how low unemployment can go without feeding inflation.</p>
<p>Former OECD official Adrian Blundell-Wignall said the concept was not helpful “even in the short run, and certainly not the long run” because NAIRU kept changing depending on what else was going on in the domestic and global economy.</p>
<p>Any rate of unemployment would have a different implication for inflation depending on what the government was doing with tax and spending policy.</p>
<p>Geopolitical events and climate change have probably pushed up the rate of inflation to be expected from any given domestic unemployment rate.</p>
<h2>3.5% unemployment, yet falling inflation</h2>
<p>Craig Emerson, a former minister in the Rudd and Gillard governments, said NAIRU was best described as the lowest unemployment rate consistent with inflation not taking off. Given Australia’s inflation rate is now coming <a href="https://theconversation.com/underlying-inflation-has-slipped-below-6-but-is-the-slide-enough-to-stop-the-rba-pushing-up-rates-further-209852">down</a>, NAIRU is clearly below the present unemployment rate of 3.5%, he argued.</p>
<p>The University of Queensland’s John Quiggin said Australia can be considered to have full employment when the number of job vacancies matches the number of unemployed people. This is the case at present, suggesting “full employment” means an unemployment rate of 3.5%.</p>
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<p>Alison Preston from the University of Western Australia said industrial relations changes have given workers much less power to obtain higher wages than before, suggesting the “non-inflation accelerating rate of unemployment” was either lower than before or an irrelevant concept.</p>
<p>Curtin University’s Harry Bloch says there will always be a mismatch between the jobs on offer and the skills available – an academic can’t do the work of a plumber, or vice versa, for instance. But even so, he says it ought to be possible to get unemployment down to the 2% achieved repeatedly during the 1950s and 1960s.</p>
<p>Consulting economist Rana Roy says in normal times “full employment” probably meant an unemployment rate near 1%, but the business cycle meant there would always be brief – “and I stress brief” – periods when governments might have to accept an unemployment rate of nearer 2%. </p>
<h2>Fix education, job-matching and childcare</h2>
<p>Asked to select the three measures from a list of 11 that would do the most to bring down the sustainable rate of unemployment, the 51 experts overwhelmingly backed improving the quality of school education (55%), followed by improving employment services (39%) and cutting out-of-pocket childcare costs (39%).</p>
<p>There was also strong support for relaxing industrial relations to give employers greater flexibility (33%) and winding back taxes and regulations facing businesses (24%) as well as boosting enrolments in tertiary education (27%).</p>
<p>There was very little support for cutting immigration or the JobSeeker payment.</p>
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<p>Labour market specialist Sue Richardson said a high-quality job-matching service would both reduce unemployment and boost productivity because Australians would be matched to jobs for which they were best suited. </p>
<p>The unemployed who would benefit the most would be those further down the queue who were the least successful in finding jobs.</p>
<p>Industry economist Julie Toth said digital technologies and working from home were already making it easier to match Australians with jobs across a range of industries, and it was important to preserve these recent gains.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/australia-is-about-to-set-its-first-full-employment-target-and-it-will-define-peoples-lives-for-decades-210783">Australia is about to set its first full employment target – and it will define people's lives for decades</a>
</strong>
</em>
</p>
<hr>
<p>One of the panellists, Peter Tulip from the Centre for Independent Studies, rejected all the options offered for lowering the achievable unemployment rate, and said the only one that might have some effect was restraint when increasing minimum wages.</p>
<p>Another, Brian Dollery from the University of New England, said much of Australia’s unemployment had been generated by unemployment benefits that were too high.</p>
<p>Together, the results of the survey call for the government and the Reserve Bank to be ambitious about unemployment, and not to accept a rate above 4%.</p>
<p>The government’s employment <a href="https://treasury.gov.au/review/employment-whitepaper/tor">white paper</a> is due by the end of September.</p>
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<p><em>Individual responses. Click to open:</em></p>
<p><iframe id="tc-infographic-898" class="tc-infographic" height="400px" src="https://cdn.theconversation.com/infographics/898/1ff41da9f14a6f9b0f29d0716f673f7c1662db3f/site/index.html" width="100%" style="border: none" frameborder="0"></iframe></p><img src="https://counter.theconversation.com/content/211277/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Treasury and RBA believe Australia’s sustainable rate of unemployment is above 4%, but Australia’s leading economists think 3.75% is possible long-term, and have ideas about how to achieve it.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National 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>
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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>
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<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>
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<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>
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<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>
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<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>
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<span class="caption">Treasurer Chalmers, keen to highlight the role of budget measures.</span>
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<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>
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<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/2098772023-07-18T05:56:35Z2023-07-18T05:56:35ZAustralia is on the brink of ending interest rate hikes and an economic first – beating inflation without a recession<figure><img src="https://images.theconversation.com/files/537989/original/file-20230718-19-fmur8p.png?ixlib=rb-1.1.0&rect=597%2C474%2C1304%2C776&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>What if Reserve Bank Governor Philip Lowe and his successor Michele Bullock were able to achieve something truly remarkable – a steady decline in inflation without further interest rate increases, and without bringing on a recession.</p>
<p>It’s suddenly looking possible. Inflation is now coming down so quickly worldwide there’s probably no need to push it down further.</p>
<p>We couldn’t have said that a week ago. Then, the US inflation rate was <a href="https://tradingeconomics.com/united-states/inflation-cpi">4%</a>, well down on the peak of 9.1% a year earlier, but high enough for eminent economists such as former US Treasury Secretary Larry Summers to say the US would need a mountain of unemployment to bring it down further.</p>
<p>Specifically, Summers said that to <a href="https://slate.com/business/2022/07/larry-summers-massive-unemployment-fed-inflation.html">control inflation</a> the US would need </p>
<blockquote>
<p>five years of unemployment above 5% to contain inflation – in other words, we need two years of 7.5% unemployment, or five years of 6% unemployment, or one year of 10% unemployment</p>
</blockquote>
<p>That was in late June, when US inflation had slipped from 5% to 4.9% to 4% over three months. Then, it was at least arguable that it wouldn’t fall much further without another push.</p>
<p>No longer. Last week, we learned that US inflation plunged yet again to <a href="https://edition.cnn.com/2023/07/12/economy/cpi-inflation-june/index.html">3%</a> in June. Although our result for June isn’t out yet (it’s next week) it is now no longer easy to argue that progress isn’t real and continuing.</p>
<p>This graph of the latest monthly readings of annual inflation rates shows inflation peaked in the US, the UK, Canada and Australia late last year, and has been coming down fairly steadily since. </p>
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<p>Summers and others in the US used to deride those who said ultra-high inflation would go away as “<a href="https://www.washingtonpost.com/opinions/2021/11/15/inflation-its-past-time-team-transitory-stand-down/">team transitory</a>”. But it is now looking as if that high inflation was indeed transitory, even if the transition took longer than expected.</p>
<p>Driving down inflation has been one of the key forces that drove it up: energy and transport prices, which surged in the wake of Russia’s February 2022 invasion of Ukraine. </p>
<p>US energy prices have fallen 16.7% over the past year, led down by a <a href="https://www.bls.gov/news.release/cpi.nr0.htm">26.5%</a> slide in the price of what Australians call petrol. That’s a saving that will push down Australia’s inflation rate and inflation rates worldwide.</p>
<p>Non-energy and non-food inflation fell as well, suggesting that there isn’t (yet) a psychology of expectations holding US inflation up.</p>
<h2>Falling inflation expectations</h2>
<p>Here, Australians expect falling inflation, if their answers to the Melbourne Insitute’s monthly <a href="https://melbourneinstitute.unimelb.edu.au/publications/macroeconomic-reports/latest-news/survey-of-consumer-inflationary-and-wage-expectations">expectations survey</a> are to be believed. In June, those surveyed expected inflation of 5.2% in the year ahead, down from 6.3% a year earlier.</p>
<p>This makes Australians less likely than they were to bake high inflation into wage negotiations and other decisions, making it less likely inflation will remain high.</p>
<p>And it ought to be noted that the inflation Australians say they expect has traditionally been <a href="https://tradingeconomics.com/australia/inflation-expectations">much more than what’s been delivered</a>. That’s presumably because most of us notice the prices that are going up more than those that aren’t.</p>
<h2>A soft landing, without a recession</h2>
<p>The much <a href="https://www.forbes.com/advisor/investing/inflation-outlook-2023/">quicker than expected</a> collapse in US inflation has dramatically raised the likelihood of what’s called a “<a href="https://www.nytimes.com/2023/07/13/opinion/paul-krugman-soft-landing-inflation.html">soft landing</a>” in the US. Here in Australia, it’s what our current Reserve Bank Governor has called staying on the “<a href="https://www.rba.gov.au/speeches/2023/sp-gov-2023-06-07.html">narrow path</a>” of returning inflation to target in a reasonable timeframe, without a recession.</p>
<p>If that happens, finance journalist <a href="https://thenewdaily.com.au/opinion/2023/07/17/rba-michele-bullock-good-omens/">Alan Kohler</a> says Lowe and his successor Michele Bullock (who takes over in September) will be the first team at the top of the bank to get inflation down from above 7% without delivering a recession.</p>
<p>There was a recession when the bank tried to get inflation down below 7% in the mid-1970s, in the early 1980s, and in the early 1990s.</p>
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<p>That we might be able to pull off yet another first ought no longer to surprise us, after all of the firsts during COVID. Enduring Australia’s (brief) 2020 recession without unemployment climbing above 7% was also a first.</p>
<p>The minutes of the Reserve Bank’s June board meeting released on Tuesday show it is prepared to <a href="https://www.rba.gov.au/monetary-policy/rba-board-minutes/2023/2023-07-04.html">countenance</a> such a first. </p>
<p>The bank’s board members acknowledged that inflation was “now declining, albeit from a high level”, while falling commodity and shipping prices were cutting cost pressures. All this before the <a href="https://theconversation.com/the-rba-has-kept-interest-rates-on-hold-heres-why-itll-be-cautious-from-here-on-208917">full effect</a> of the bank’s 12 rate rises to date has been felt.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/meet-michele-bullock-the-rba-insider-tasked-with-making-the-reserve-bank-more-outward-looking-as-its-next-governor-209379">Meet Michele Bullock, the RBA insider tasked with making the Reserve Bank more outward-looking as its next governor</a>
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<p>Remember, these are minutes of a meeting that took place <em>before</em> last week’s extraordinarily good news from the US. Those board members’ comments hold open the possibility of Australia keeping the bulk of its gains in employment, while getting inflation back down to controllable levels. </p>
<p>The fact that it has never happened before hasn’t stopped the economics team at the ANZ Bank from <a href="https://cdn.theconversation.com/static_files/files/2748/Change_in_RBA_call_an_extended_pause_at_4_1.pdf">predicting</a> it – no further rate rises from here on, a continuing slide in inflation, and only a modest uptrend in unemployment.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/new-findings-show-a-direct-causal-relationship-between-unemployment-and-suicide-209486">New findings show a direct causal relationship between unemployment and suicide</a>
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<h2>A ‘Goldilocks’ economy is in sight</h2>
<p>The “<a href="https://www.investopedia.com/terms/g/goldilockseconomy.asp">Goldilocks</a>” outcome – not too hot or too cold, but just right – would be keeping in work most of the Australians who got into work when unemployment fell <em>and</em> getting on top of inflation. If we can manage that, we will have done future Australians an enormous service.</p>
<p>Things get easier when unemployment is low. We get more likely to become more productive, because we’re less resistant to change when unemployment is less of a threat. We get in a better position to help the budget, by taking less in benefits and paying more in tax. And we become more like each other – lessening inequality.</p>
<p>It is looking as if the Reserve Bank has the opportunity to cement low unemployment <em>while</em> controlling inflation. Holding off (and perhaps abandoning) future rate raises will keep it in reach.</p>
<p>Our next official inflation update, due out next Wednesday, will matter a lot.</p><img src="https://counter.theconversation.com/content/209877/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>Even a week ago we couldn’t have predicted this. But after good news from the US, our Reserve Bank now has a chance to cement low unemployment while controlling inflation – without more rate rises.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2097932023-07-14T03:58:00Z2023-07-14T03:58:00ZPolitics with Michelle Grattan: Treasurer Jim Chalmers on Michele Bullock’s appointment as Reserve Bank Governor<p>For months, speculation has swirled about the appointment of a new governor of the Reserve Bank, a key position in the management of the Australian economy. </p>
<p>The present governor, Philip Lowe, has faced sharp criticism, especially over his prediction interest rates would be held steady until 2024, which proved wrong. It always seemed unlikely he would get another term. </p>
<p>Now the government has named his successor – the present deputy governor Michele Bullock. She will be the first woman to hold the position. </p>
<p>From the government’s point of view, it is a cautious appointment, signalling both continuity and change. Bullock is of the bank, but she will oversee the reforms that have come out of the review of its operations. </p>
<p>Treasurer Jim Chalmers joins the podcast to talk about the new governor. </p>
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<p>TRANSCRIPT</p>
<p>E&OE TRANSCRIPT
PODCAST INTERVIEW
THE CONVERSATION
FRIDAY, 14 JULY 2023</p>
<p>SUBJECTS: RBA Governor appointment, inflation, global economy, interest rates, cost-of-living relief, Fadden by-election.</p>
<p>MICHELLE GRATTAN, HOST: After months of speculation we have a new head of the Reserve Bank. Phil Lowe, who’s presided over a dozen rises in interest rates, will leave when his term ends in September. He’ll be replaced by his deputy Michele Bullock, who’s been with the bank nearly four decades. Michele Bullock becomes the first woman to head the bank in its history. Today, Treasurer Jim Chalmers joins us to talk about the new appointment. Jim Chalmers, thanks for talking with us so quickly after the announcement. Why have you chosen Michele Bullock?</p>
<p>JIM CHALMERS, TREASURER: Thanks for the chance to have another chat, Michelle. Michele Bullock is a terrific economist but also a really accomplished and respected leader. Her appointment really is the best combination of experience and expertise as well as a fresh leadership perspective at the bank. It’s also an historic appointment - the first woman ever to lead the Reserve Bank in its 63-year history. So Michele will become the ninth Governor of the Reserve Bank, and she will take up the role on the 18th of September and the Government is really proud to appoint her.</p>
<p>GRATTAN: So you’ve also got your top economic bureaucrats still in place. They were on the list, of course, but is this the best of all worlds?</p>
<p>CHALMERS: There was a lot of speculation about two of the really quite remarkable public servants of their generation, Steven Kennedy at Treasury and Jenny Wilkinson at Finance. I have a mountain of respect for both of them. And this is the best of all worlds: Michele Bullock is the best person to take the Reserve Bank forward into the future, and Steven Kennedy remains at Treasury and Jenny Wilkinson at Finance. And because we are entering another difficult period for our economy and for the global economy, I think it matters a great deal to have three people of their character and calibre in the three key positions, which will help the country most importantly, but also the Government navigate this global uncertainty that we are confronting right now.</p>
<p>GRATTAN: The new governor will be implementing the changes after the review of the bank but one observation of that review, one problem was groupthink there. Michele Bullock has been part of the group for nearly four decades. She’s a fresh face in the governor position but is she fresh enough?</p>
<p>CHALMERS: I think so. I mean, Michele Bullock will bring a fresh leadership perspective to the governorship of the Reserve Bank, but also and maybe this isn’t obvious to everyone but also Michele has played a really thoughtful and considerate and constructive role in the Reserve Bank Review itself. And as I’ve come to work with her and know her well, I’m really confident that one of the best things about this appointment is the way that her gravitas, her heft, her relationship with the board, her relationship with the broader economic community will help us bed down and implement the recommendations of that really important review. And that was a big part of our considerations in naming her today and asking the Cabinet to agree to her appointment.</p>
<p>GRATTAN: Do you expect that monetary policy will change much under her?</p>
<p>CHALMERS: I want to make this really clear, Michelle, I cherish the independence of the Reserve Bank and everything I’ve tried to do with this RBA Review and even this appointment is to invest in the independence of the bank rather than undermine it. And so this decision to appoint Michele Bullock is not about any one monetary policy decision or another. I still don’t pre-empt or second guess decisions taken independently by the Reserve Bank. They will make their decisions independently. The Government’s focused on our part of all of this, which is to take some of the edge off these cost-of-living pressures without adding to inflation, and that’s what our economic plan is all about.</p>
<p>GRATTAN: How do you think the overall operation of the bank will change in light of the review?</p>
<p>CHALMERS: I think one of the most thoughtful parts of the Reserve Bank Review which is a first-class document, and Renée Fry-McKibbin and Carolyn Wilkins and Gordon de Brouwer deserve the country’s thanks for the way that they tackled this review. It is, in my view, a very comprehensive and intelligent piece of work. And one of the big focuses is how do we make sure that we get the culture and the institution itself right so that it’s the world’s best central bank. And I think having a fresh leadership perspective there will be important. That’s not to in any way run down or diminish the really quite extraordinary contribution that Phil Lowe has made for more than four decades there. And I mean it when I say that Phil Lowe goes with the Government’s respect, the Government’s gratitude and also with dignity. He has carried himself impeccably throughout this. I speak with him frequently, I’ve known him a long time, and on a personal level, I have a lot of respect and regard for him. And so the bank will change when the leadership of the bank changes but I think more importantly than that, or in addition to that, at least it will change because of the work that we’ve put into it via the Reserve Bank Review to make sure that we get the best possible bank to confront the challenges of the future.</p>
<p>GRATTAN: Phil Lowe has copped an enormous amount of criticism over recent months as interest rates have risen. I can’t remember any previous governor being in the hot seat so much. Do you think the critics have been too hard on him?</p>
<p>CHALMERS: What I’ve tried to do when it comes to the criticism of decisions taken by the Reserve Bank is to make it clear that the Reserve Bank takes a decision about interest rates and then they defend that in the public realm, and that’s appropriate. No institution should be beyond criticism or beyond reproach, and that’s true of the Reserve Bank as well. And so where there is criticism, it should be respectfully levelled and it will be respectfully responded to. I think that’s a good model, and same for the government, frankly. I’ve got my own job, and I’m focused on doing it. We’ve done so much over the course of the last 14 months, I’ve got my job to do, they’ve got a job to do. I defend my decisions and actions and they defend theirs.</p>
<p>GRATTAN: Talking more broadly, the latest US inflation figure, which was out this week shows it down in that country to 3 per cent. The inflation problem is subsiding globally. What are the implications for Australia? I noticed the ANZ today said in a statement that it’s expecting an extended pause in rates.</p>
<p>CHALMERS: I was really encouraged by the inflation number in the US not because I think that the Americans are necessarily out of the woods, but because inflation is moderating there, as inflation is moderating here in Australia as well, and that’s a good thing. We’d like it to moderate quicker. Obviously, a lot of eyes are on the American economy, it has proven itself to be remarkably resilient and robust but there are still risks in the US. There are risks in China. Europe is in recession, the Kiwis are in recession and others. And so what the economists describe as risks being tilted to the downside really means that there’s still enough global uncertainty to trouble us, that we monitor very closely, because there will be implications for us. Our economy is slowing. There’s every chance it’s slowing considerably because of a combination of the global factors, but also those rate rises, which began before the election.</p>
<p>GRATTAN: So that makes for a longer-term pause?</p>
<p>CHALMERS: Well, again, I don’t want to pre-empt the decisions that the Reserve Bank board might take into the future but no doubt they will weigh all of that up, and they’ll come to their decision independently.</p>
<p>GRATTAN: You said in a speech this week that responsible economic management and compassion are complimentary, not in conflict. But interpretations of that speech differed. Some said you were saying you were open to more cost-of-living relief. Others said you were holding the line against that. Can you just clarify for us?</p>
<p>CHALMERS: The point that I was making was for too long - and this has been a frustration of mine - the commentary has made it sound like you can be responsible economic managers or you can help people through tough times. And what we’ve shown as a government, and we’re proud of this, we’ve been able to dramatically improve the budget position at the same time as we provide cost-of-living help. And so what we’re focused on is not new cost-of-living measures, but rolling out billions of dollars of cost-of-living help at the moment, whether it’s cheaper early childhood education, cheaper medicines, taking some of the edge off electricity bills, rent assistance, and the like. That’s our focus, rolling that out. But the point that I made, and the reason why there was that commentary, Michelle, in the aftermath of that speech is that if you have a budget in much better nick and you’re rolling out cost-of-living help, it actually provides a more solid foundation down the track if things deteriorate faster than you anticipated, to do more if you want to. But that’s not our focus. We’re not working up new cost-of-living measures. We’re rolling out what we’ve announced over the course of the last two budgets, but a much stronger budget makes us more resilient to some of these global uncertainties that we’ve been talking about.</p>
<p>GRATTAN: Just finally, you’re a Queenslander. What’s your prediction for tomorrow’s Fadden by-election?</p>
<p>CHALMERS: It’s going to be extraordinarily difficult. I don’t think anyone really expects, despite the fact that we’ve got a wonderful candidate in Letitia Del Fabbro, I don’t think anybody expects that seat to change hands and that’s because by-elections are good for oppositions rather than for governments. And that’s been a rock-solid blue ribbon, Liberal-LNP seat for I think all of my lifetime. And so we’ve got realistic expectations about it. I’ll be handing out how-to-vote cards with Letitia. I’ll be down there supporting a really wonderful local nurse but I think our expectations of Fadden are pretty well tempered.</p>
<p>GRATTAN: Jim Chalmers, thanks for talking with us today.</p>
<p>ENDS</p><img src="https://counter.theconversation.com/content/209793/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 government has announced who Philip Lowe's successor is, deputy governor Michele Bullock - She will be the first woman to hold the position.Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2093792023-07-14T03:32:06Z2023-07-14T03:32:06ZMeet Michele Bullock, the RBA insider tasked with making the Reserve Bank more outward-looking as its next governor<p>Australia’s next Reserve Bank governor, <a href="https://ministers.treasury.gov.au/ministers/jim-chalmers-2022/media-releases/new-governor-reserve-bank-australia">Michele Bullock</a> – the first woman in the job – will take office in September at a time when much of the bank’s work in fighting inflation will be done and its focus will be on changing the way it operates.</p>
<p>She is already the deputy governor, having been appointed to that post by the previous treasurer Josh Frydenberg in April last year.</p>
<p>Both Treasurer Jim Chalmers and Prime Minister Anthony Albanese say she is the right person to implement recommendations of the <a href="https://theconversation.com/rba-revolution-how-chalmers-will-recraft-the-bank-for-the-21st-century-204139">independent review</a> of the bank intended to make it less insular and more open to outside perspectives.</p>
<p>Yet, as a 38-year veteran of the bank, having joined in <a href="https://www.rba.gov.au/about-rba/people/deputy-gov.html">1985</a>, she could be seen as perhaps another insider.</p>
<p>But in another way she is an outsider, having been in positions outside of the core economic policy group since 1998 and only being on the RBA’s Board for the past year.</p>
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Read more:
<a href="https://theconversation.com/reserve-bank-veteran-michele-bullock-becomes-first-woman-governor-replacing-philip-lowe-209785">Reserve Bank veteran Michele Bullock becomes first woman governor, replacing Philip Lowe</a>
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<p>In those 25 years, Bullock has worked as either assistant governor or head of the parts of the bank that deal with the payments system, the financial system, business services, and the issuing of currency.</p>
<p>Not being part of the group that helped make the interest rate decisions for which the bank has come under makes her well placed to do things differently.</p>
<p>Bullock was raised in regional New South Wales and studied economics at high school and the University of New England, graduating with honours.</p>
<p>She inherits an organisation criticised in this year’s independent review for being “insular” and vulnerable to “group think” and for encouraging mortgage holders to believe it would not be increasing rates shortly before it began a series of 12 near-consecutive rate increases in May 2022.</p>
<h2>Why was Philip Lowe passed over?</h2>
<p>Chalmers was keen to point out that the decision not to reappoint Governor Philip Lowe at the end of his seven-year term was in no day a <a href="https://www.pm.gov.au/media/press-conference-canberra-4">personal reflection</a> of Lowe’s work, thanking him </p>
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<p>for more than four decades of dedication and commitment and service, not just to the Reserve Bank and not just to the economy, but to our country as well; Phil Lowe goes with our respect, he goes with our gratitude, and he goes with dignity.</p>
</blockquote>
<p>Lowe’s work during the early years of the COVID crisis was indeed top-notch. He worked around the clock to keep the economy afloat during a myriad of lockdowns and shortages. </p>
<p>However the government clearly thought he was not the best person to lead the bank from here on, even though he had said he was prepared to serve. Why not?</p>
<p>Here are three reasons:</p>
<p>One is the mistake he made as governor trying to keep the unemployment rate high to reign in home prices prior to the pandemic. </p>
<p>Under Lowe, the bank adopted a deliberate policy of keeping interest rates higher than were needed to restrain inflation, leading to higher-than-needed unemployment.</p>
<p>An estimate by myself and Andrew Leigh, calculated using the Reserve Bank’s own economic model published in the <a href="https://onlinelibrary.wiley.com/doi/epdf/10.1111/1475-4932.12689">Economic Record</a>, finds this cost the economy more than 270,000 jobs.</p>
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Read more:
<a href="https://theconversation.com/the-rbas-failure-to-cut-rates-faster-may-have-cost-270-000-jobs-185381">The RBA's failure to cut rates faster may have cost 270,000 jobs</a>
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<p>Another reason to deny Lowe a second term is the bank’s mistaken approach to <a href="https://theconversation.com/rba-governor-philip-lowes-dangerous-game-on-interest-rates-164064">forward guidance</a>, which effectively promised Australian households that interest rates would stay near zero until 2024. This turned out not to happen, hurt many home buyers and damaged the bank’s credibility.</p>
<p>And yet another reason is that the review of the bank found a hierarchical work environment in which decisions were not questioned, staff were not listened to and agreement with those at the top was encouraged. </p>
<p>Lowe rejected several of these findings, which is why changing the culture at the top of the bank would have been difficult had he remained.</p>
<h2>What’s next?</h2>
<p>The big question facing the bank at the moment is how high to lift interest rates to reign in inflation and bring it back towards the RBA’s 2–3% target band.</p>
<p>Bullock and her replacement as deputy (to be announced by Chalmers shortly) take office in September.</p>
<p>By then it is unlikely there will be much to do differently. Inflation is on the way down throughout the world. This week US inflation fell to just below <a href="https://tradingeconomics.com/united-states/inflation-cpi">3%</a>, the least since March 2022. Australia gets its next quarterly update this month.</p>
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Read more:
<a href="https://theconversation.com/the-rba-has-kept-interest-rates-on-hold-itll-be-cautious-from-here-on-208917">The RBA has kept interest rates on hold. It'll be cautious from here on</a>
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<p>On Friday the ANZ bank changed its view of the future course of interest rates, saying it expected <a href="https://cdn.theconversation.com/static_files/files/2748/Change_in_RBA_call_an_extended_pause_at_4_1.pdf">no further hikes from here on</a>.</p>
<p>It stressed this change of view was unrelated to the change of governor.</p>
<p>In its view, consumer spending was deteriorating, and much of the damage from the 12 interest rate rises to date was yet to be felt.</p>
<p>Whether or not Bullock faces fewer challenges than Lowe did, she is well placed to lead one of Australia’s most important institutions into the 21st century.</p><img src="https://counter.theconversation.com/content/209379/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>Although she has been with the bank four decades, the past two have been in areas remote from the setting of interest rates, meaning she won’t feel compelled to defend the mistakes of the past.Isaac Gross, Lecturer in Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2097852023-07-14T00:13:04Z2023-07-14T00:13:04ZReserve Bank veteran Michele Bullock becomes first woman governor, replacing Philip Lowe<figure><img src="https://images.theconversation.com/files/537424/original/file-20230714-21-q0alzj.png?ixlib=rb-1.1.0&rect=0%2C0%2C2816%2C1500&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Darren England/AAP</span></span></figcaption></figure><p>The government has appointed Michele Bullock the new governor of the Reserve Bank – the first woman to occupy the post. </p>
<p>Bullock, currently deputy governor, replaces Philip Lowe, who has weathered strong criticism, including from within Labor, during sustained rises in interest rates.</p>
<p>Bullock’s appointment was announced by Prime Minister Anthony Albanese and Treasurer Jim Chalmers at a joint news conference, after cabinet ticked off on Chalmers’ recommendation. </p>
<p>Chalmers said: </p>
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<p>Michele is an outstanding economist, but also an accomplished and respected leader. Her appointment best combines experience and expertise with a fresh leadership perspective at the Reserve Bank as well. </p>
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<p>He said Bullock was “fiercely independent.”</p>
<p>Bullock has worked for the bank for nearly four decades.</p>
<p>The announcement comes after months of speculation about Lowe’s future. The shortlist included treasury secretary Steven Kennedy and finance department secretary Jenny Wilkinson. </p>
<p>Lowe’s term, which started in 2016, runs out in September. </p>
<p>He made it clear as recently as this week that he would like another term. But this never seemed likely in view of the criticisms of him and the fact the government wanted a fresh face to oversee the extensive reforms of the bank following the recent review. </p>
<p>These changes will see two boards replace the present one, with interest rates to be set by a more specialist board.</p>
<p>The main criticisms of Lowe have been his inaccurate prediction rates would not rise before 2024, and (by some) that the bank was too slow in starting to put them up. </p>
<p>Among the public, with people suffering acute cost of living pressures, he became the face of mortgage pain. There have been a dozen rises in something over a year. </p>
<p>Lowe has been adamant that rates must rise as high as necessary to deal with inflation. The Reserve Bank paused the cash rate this month, but Lowe made it clear rates could go higher if necessary. </p>
<p>Lowe said in a statement Chalmers had made a “first-rate appointment”.</p>
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<p>The Reserve Bank is in very good hands as it deals with the current inflation challenge and implementing the recommendations of the Review of the RBA. I wish Michele all the best.</p>
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<p>Bullock said she was “deeply honoured”.</p>
<p>Lowe will continue in his position until the end of his term on September 17. Chalmers said he would select a replacement for Bullock as deputy governor before then.</p>
<p>Bullock is the ninth governor of the RBA. Five of the previous governors have only served one term of seven years. The average length served as governor is less than eight years.</p><img src="https://counter.theconversation.com/content/209785/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 government has appointed Michele Bullock the new governor of the Reserve Bank – the first woman to occupy the post. Bullock, currently deputy governor, replaces Philip Lowe, who has weathered strong…Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2095972023-07-12T05:22:01Z2023-07-12T05:22:01ZReserve Bank Governor Lowe announces changes to bank’s operations as cabinet readies to approve who will lead it<p>Reserve Bank Governor Philip Lowe has announced a raft of reforms the bank will make following the recent review of its operations, as the government prepares to announce who will lead it after his term expires in September. </p>
<p>Lowe also reiterated that interest rates – held steady by the bank this month – might have to rise further to combat inflation. </p>
<p>It is generally expected Lowe will be replaced, when Treasurer Jim Chalmers takes his recommendation to cabinet. Contenders for the post include secretary of the finance department Jenny Wilkinson, bank deputy governor Michele Bullock, treasury secretary Steven Kennedy, head of the Australian Bureau of Statistics, David Gruen, and former RBA deputy governor Guy Debelle. </p>
<p>The government has accepted all <a href="https://rbareview.gov.au/final-report">the review’s recommendations</a> in principle. They include having two boards – a Monetary Policy Board with greater economic expertise to set monetary policy, and a Governance Board to oversee corporate governance. </p>
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<a href="https://theconversation.com/reserve-bank-to-have-two-boards-after-overhaul-by-inquiry-204122">Reserve Bank to have two boards after overhaul by inquiry</a>
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<p>Lowe, speaking at an Economics Society business lunch in Brisbane, when questioned said once again that he would be honoured to continue in his post if asked. </p>
<p>Chalmers said on Wednesday that he would soon take to cabinet his recommendation on the governorship.</p>
<p>In the changes the bank’s board has approved, from next year the board will meet eight times a year, rather than the present 11 times. The board meetings will also be longer. </p>
<p>“The less frequent and longer meetings will provide more time for the board to examine issues in detail and to have deeper discussions on monetary policy strategy,” Lowe said. </p>
<p>In other changes, the governor will face the media after each board meeting to explain its decision on rates. The post-meeting statement will be in the name of the board, rather than the governor, as at present.</p>
<p>All board members will have the opportunity to attend an internal staff meeting some time before a board meeting, allowing them to question a broader range of staff.</p>
<p>The board will oversee the bank’s research agenda as it relates to monetary policy and aspects of financial stability.</p>
<p>Lowe said some other recommendations from the review were being left for after “the legislative process has been completed and the new Monetary Policy Board is up and running”. The review suggested this take office in July 2024.</p>
<p>These recommendations include the publication of an unattributed vote count on decisions; all board members making public appearances to discuss their thinking and decisions on monetary policy, and the establishment of an expert advisory group to engage with the board.</p>
<p>“In my view, it is right to allow the new board to consider these issues and make its own decisions,” Lowe said.</p>
<p>On interest rates, Lowe was – as usual – adamant that the bank would do whatever was needed to bring down inflation to the target range of 2-3%. </p>
<p>“Our priority remains to ensure this period of high inflation is only temporary,” he said. “If high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment. </p>
<p>"It is for these reasons that the board is resolute in its determination to return inflation to target within a reasonable timeframe and will do what is necessary to achieve that.” </p>
<p>Chalmers told reporters the governor appointment “is one of the biggest appointments that the government will make. It’s a big job and it’s a big call.” He said he had had discussions about the appointment with shadow treasurer Angus Taylor. </p>
<p>Lowe will be with Chalmers at the G20 finance ministers meeting in India early next week.</p><img src="https://counter.theconversation.com/content/209597/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>It is generally expected Lowe will be replaced, when Treasurer Jim Chalmers takes his recommendation to cabinetMichelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2089172023-07-04T05:34:17Z2023-07-04T05:34:17ZThe RBA has kept interest rates on hold. It’ll be cautious from here on<figure><img src="https://images.theconversation.com/files/535429/original/file-20230704-242397-lqrvjx.png?ixlib=rb-1.1.0&rect=448%2C313%2C1290%2C577&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Lukas Coch/AAP</span></span></figcaption></figure><p>The Reserve Bank decided to keep interest rates on hold at 4.1% because it thinks there’s a chance – just a chance – it has lifted them all it needs to.</p>
<p>In his statement released after Tuesday’s board meeting, Governor Philip Lowe said while inflation was still too high and set to remain so for some time yet, it had “<a href="https://www.rba.gov.au/media-releases/2023/mr-23-16.html">passed its peak</a>”.</p>
<p>Growth in the Australian economy had slowed and labour market conditions had eased, although they remained tight.</p>
<p>After 12 near-consecutive rate hikes, and in light of the “uncertainty surrounding the economic outlook”, it had decided to wait at least a month before hiking again until it knew more about the impact of what it has done on inflation and the health of the economy.</p>
<p>And when you compare Australians’ experience of rising rates with other countries, the Reserve Bank has already done more than many people realise.</p>
<h2>Rising rates have hit Australian borrowers harder</h2>
<p>Criticism of Australia’s Reserve Bank for not pushing up its cash rate as far as <a href="https://www.afr.com/wealth/personal-finance/prepare-for-equities-and-property-pain-20230628-p5dk7k">other countries</a> overlooks an important difference between Australian borrowers and borrowers in those countries.</p>
<p>Canada has lifted its central bank rate from close to zero to <a href="https://www.bankofcanada.ca/core-functions/monetary-policy/key-interest-rate/">4.75%</a>, Britain to <a href="https://www.bankofengland.co.uk/boeapps/database/Bank-Rate.asp">5%</a>, the US to <a href="https://tradingeconomics.com/united-states/interest-rate">just above 5%</a> and New Zealand to <a href="https://www.rbnz.govt.nz/monetary-policy/about-monetary-policy/the-official-cash-rate">5.5%</a>.</p>
<p>Yet Australia’s increase – from close to zero to 4.1% – has caused Australian borrowers <a href="https://www.rba.gov.au/publications/smp/2023/feb/pdf/box-a-mortgage-interest-payments-in-advanced-economies.pdf">much, much more pain</a> than borrowers in those other countries.</p>
<p>That’s because an exceptionally large proportion of Australian mortgage holders are on variable rates: roughly <a href="https://www.rba.gov.au/publications/smp/2023/feb/pdf/box-a-mortgage-interest-payments-in-advanced-economies.pdf">70%</a>. That’s compared to 35% in Canada, 15% in the UK, 12% in New Zealand and less than 5% in the United States.</p>
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Read more:
<a href="https://theconversation.com/why-the-bank-of-englands-interest-rate-hikes-arent-slowing-inflation-enough-and-what-that-means-for-mortgages-208215">Why the Bank of England's interest rate hikes aren't slowing inflation enough and what that means for mortgages</a>
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<p>In the words of Australia’s Reserve Bank: “interest rates on loans with very
long fixed-rate terms tend to be less sensitive to changes in the short-term rates”.</p>
<p>Back in February, the Reserve Bank’s estimate was that the interest rates actually paid on Australian mortgages had climbed <a href="https://www.rba.gov.au/publications/smp/2023/feb/pdf/box-a-mortgage-interest-payments-in-advanced-economies.pdf">two percentage points</a> since it began pushing up rates. </p>
<p>In contrast – as this Reserve Bank chart shows – the rates actually paid in New Zealand had climbed by one and half percentage points, the rates in the UK by just <a href="https://www.rba.gov.au/publications/smp/2023/feb/pdf/box-a-mortgage-interest-payments-in-advanced-economies.pdf">half</a> a percentage point, and the rates in the United States by very little at all.</p>
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<p><strong>Increases in mortgage rates actually paid</strong></p>
<p><em>Months since the official rate began climbing. 100 = one percentage point</em></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/535445/original/file-20230704-18-e5g0b9.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/535445/original/file-20230704-18-e5g0b9.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/535445/original/file-20230704-18-e5g0b9.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=344&fit=crop&dpr=1 600w, https://images.theconversation.com/files/535445/original/file-20230704-18-e5g0b9.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=344&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/535445/original/file-20230704-18-e5g0b9.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=344&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/535445/original/file-20230704-18-e5g0b9.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=433&fit=crop&dpr=1 754w, https://images.theconversation.com/files/535445/original/file-20230704-18-e5g0b9.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=433&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/535445/original/file-20230704-18-e5g0b9.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=433&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="attribution"><a class="source" href="https://www.rba.gov.au/publications/smp/2023/feb/box-a-mortgage-interest-payments-in-advanced-economies.html">RBA APRA, February 2023</a></span>
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<p>And because mortgages themselves are so much bigger than they used to be, the dramatic increase in rates actually paid costs a lot more than it would have.</p>
<p>Modelling by Ben Phillips at the ANU’s Centre for Social Research and Methods suggests that in the past two years, the average share of mortgaged households’ post-tax income devoted to payments has jumped from 17% to 25% – the biggest share in an <a href="https://csrm.cass.anu.edu.au/sites/default/files/docs/2023/6/Housing_Costs.pdf">awfully long time</a>.</p>
<p>And it’s set to get worse, whatever the bank does to its cash rate.</p>
<h2>The looming mortgage cliff</h2>
<p>Usually, Australians take out very few fixed-rate mortgages. But in 2020 and 2021, we took out lots with fixed two- and three-year rates, when fixed rates were low. </p>
<p>As many as <a href="https://www.afr.com/politics/how-bad-will-the-looming-mortgage-cliff-be-in-five-charts-20230209-p5cjbd">880,000</a> of those fixed-rate terms are about to expire, pushing those borrowers from rates of around 2% (which might cost $2,100 per month to service) to rates nearer 5.5% (which might cost $3,000 to service).</p>
<p>The Reserve Bank itself expects <a href="https://www.rba.gov.au/publications/fsr/2022/oct/box-b-the-impact-of-rising-interest-rates-and-inflation-on-indebted-households-cash-flows.html">15%</a> of borrowers to find themselves with negative cash flows in the coming months – meaning their incomings won’t match their outgoings and they’ll have to run down savings, <a href="https://twitter.com/10NewsFirstMelb/status/1666293017152745472">work more hours</a>, or tighten belts.</p>
<p>We’re already winding back spending. Although total retail spending has climbed <a href="https://www.abs.gov.au/statistics/industry/retail-and-wholesale-trade/retail-trade-australia/latest-release#">4.2%</a> over the past year, prices have probably climbed 7% while the population has climbed <a href="https://www.abs.gov.au/statistics/people/population/national-state-and-territory-population/latest-release">2%</a>. This means the amount bought per person has shrunk sharply.</p>
<h2>Recession is increasingly likely</h2>
<p>Anything that makes us cut back even more runs the risk of bringing on a recession, something that’s already happened in <a href="https://www.abc.net.au/news/2023-06-16/nz-enters-a-recession-as-economy-shrinks-again/102477992">New Zealand</a> and may be about to happen in the <a href="https://www.theguardian.com/business/2023/may/26/rishi-sunak-warned-over-possible-uk-recession-in-2024">United Kingdom</a>.</p>
<p>At the start of this week, The Conversation’s <a href="https://theconversation.com/two-more-rba-rate-hikes-tumbling-inflation-and-a-high-chance-of-recession-how-our-forecasting-panel-sees-2023-24-208477">expert forecasting panel</a> assigned a 38% probability to a recession in Australia, much more than at the start of the year, but still less than 50% – meaning we might escape it.</p>
<p>The panel’s central forecast is for two more rate hikes this year, which it expects to be quickly unwound. If that happens, and if we escape a recession, the panel expects unemployment to climb only modestly over the year ahead while inflation glides down to 3.9% – within spitting distance of the Reserve Bank’s 2-3% target.</p>
<p>Lowe says getting things right means staying on a <a href="https://www.rba.gov.au/speeches/2023/sp-gov-2023-06-07.html">narrow path</a>.</p>
<h2>The case for living with higher inflation</h2>
<p>That path might mean accepting a slower glide down in inflation than some would like, or even a higher end point – something closer to 3% than 2-3%. </p>
<p>Nobel prize-winning economist Paul Krugman this week suggested quietly abandoning the US inflation target (of 2%) once inflation dropped to a point where people <a href="https://twitter.com/paulkrugman/status/1675170192572178433">no longer noticed it all the time</a>, which he thought would be about 3-4%.</p>
<p>There would be a case for doing that here, so long as inflation was stable, predictable and no longer causing alarm. It’d help keep unemployment low.</p>
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Read more:
<a href="https://theconversation.com/two-more-rba-rate-hikes-tumbling-inflation-and-a-high-chance-of-recession-how-our-forecasting-panel-sees-2023-24-208477">Two more RBA rate hikes, tumbling inflation, and a high chance of recession: how our forecasting panel sees 2023-24</a>
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<p>In any event, we’re nowhere near there yet. The March quarter inflation figure (the most recent quarterly figure) put the annual rate at <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release">7%</a>. The update due in three weeks will show how quickly we are moving toward 4%.</p>
<p>When we get there, Lowe or his successor (Lowe’s term expires in September) will have time to think about how important ultra-low inflation of 2-3% really is, and whether it is worth the cost to Australians of getting there.</p><img src="https://counter.theconversation.com/content/208917/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>Australian home borrowers are experiencing much, much more interest rate pain than borrowers in New Zealand, Canada, the UK or US – for one simple reason.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.