Mortgage holders are in for yet more repayment pain as an uneasy Reserve Bank faces off against inflation that just won’t go away.
The hints began a week ago when RBA boss Michele Bullock had a “fireside chat” with an audience in Sydney — she complained that repeated spikes in petrol prices were not just stopping inflation from coming back down but were causing people to expect high inflation.
“Typically when we think about shocks to supply that increase prices, you’d think: ‘Well, that’s probably okay; it’ll wash out.’ But the problem is that we’ve just got shock after shock after shock, and the more that that keeps inflation elevated, even if it’s from supply shocks, the more people adjust their thinking,” she said. “And the more people adjust their inflation expectations, the more entrenched inflation is likely to become. So that’s the challenge.”
What followed was her big debut speech on Tuesday night, when she made it crystal clear that she will pull the rates trigger if needed: “The board will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation.”
Public communication is a vital weapon in any central bank’s armoury, and those two communiques aimed to make it clear that the new RBA boss isn’t afraid to raise rates if needed. So when the latest inflation data came out yesterday, it dropped like an axe on to the necks of borrowers. The official quarterly inflation data was bad, but the monthly inflation indicator was even worse.
The official series fell from 6% to 5.4%. The monthly indicator is less comprehensive, but much more frequent. It shows that in the past three months, inflation has surged. It was 4.9% cent back in July, 5.2% in August and a concerning 5.6% in September — i.e. it’s going the wrong way, as this chart shows.
That’s a bad trajectory — and it’s why the RBA is almost certain to act before the end of the year. Major banks scrambled to update their forecasts for the next board meeting. “We now expect the RBA to increase the cash rate by 25bp in November to 4.35%,” ANZ analysts said in a note circulated to clients minutes after the CPI data was published.
Every rate rise costs $108 a month in extra repayments to a household with the average new mortgage in NSW, assuming banks pass it on. That’s not a lot by itself, but given that rates have been raised so many times, the cumulative impact is around $1,500 a month in extra repayments.
Inflation is our nemesis. But which prices are the ones making our lives worse? Here are all the prices in the economy, indexed to 2017. You can see the problem certainly isn’t your phone bill or your clothes.
Prices have risen a lot on average since 2018. Some have risen steadily — and some, like fuel, are very volatile. If we break this down, we can see goods have risen far more than services, and that tradeables are rising more slowly than non-tradeables.
The fact that non-tradeables are rising more steeply than tradeables suggests the RBA is right to pursue a policy of rate rises. While tradeable prices are set in global markets, non-tradeable prices are set here at home by businesses who feel the effect when a household tightens its budget to afford its mortgage.
But that’s the bigger picture: the medium term. The big problem right now is oil. Petrol prices are at giddy highs because a barrel of oil costs US$90, and the number of Aussie dollars you need to scrape together to equal US$90 keeps going up. Our currency is weak and that is bringing us even higher imported inflation.
The idea of rate rises is they lift our currency and make imports cheaper. They certainly would do that if other countries weren’t raising rates at the same time. But around the world, central banks are all mashing the + button and that means our rate rises aren’t enough to move global forex markets and give the humble Aussie dollar a boost. All we can say is rate rises have stopped our dollar from falling below US50 cents.
For now, our inflation situation depends much more on stability in the Middle East than you would like. If the violence in Gaza spirals into a broader regional conflict, expect the price of oil to skyrocket. That will force the RBA to consider raising rates even more.
Are all economists really thick or just most? Fuel going up as a globally traded commodity, with price rises due to political issues in the middle east, seems like a stupid reason to RAISE rates. Colesworths jacking up prices left, right, and centre, booking billion dollar profits, while families live in their car, seems a silly reason to jack up rates. High inflation was not cuased by low rates, therefore high rates won’t fix it. They’ll just make millions unemployed
This is literally one of the objectives.
The RBA “fights” inflation by trying to make everyone so poor they stop spending. Because they don’t really have any other methods or tools available.
The previous RBA CEO, How Lowe to Go, proudly (sic!) proclaimed last year that “inflation & unemployment are still too low to meet our targets”.
Look! Somethings happened over there – that’s a shock apparently- so whack the price of oil up. On it goes,, an election is coming somewhere, hmm sounds scary, maybe- whack the price up. Oil pricing- What a joke played on the world! Price gouging whenever traders want to capitalise on an event. And then, of course, there’s OPEC who wind prices up and down on a whim around volume which is what they’ve been doing recently.
And the pain then gets passed on to Borrowers. Follow the money folks. The same creeps keep benefiting from others misery.
Can we please hasten the transition to renewable Energy and EV’s to cancel this chicanery out.
And not a single word about the immigration-induced rises in the price of rentals and housing-or their contribution to inflation.
Colour me unsurprised.
These are not external shocks by way: they are wholly within the control of this neoliberal bunch of no-hopers.
No argument that Morrison was terrible-at least we expected as much from him.
This government is a massive disappointment.
The Reserve Bank is not controlled by the government.
Correct. But the RBA has correctly identified that the increased demand due to the rapid population increase is one of the causes that inflation is still high, therefore they will keep raising rates.
So while the government doesn’t directly control the RBA they do control the migration rate.
No, that’s the FIRE media and LNP narrative, not based on credible analysis, that the RW MSM prefers, blame the other…. and indiretcly ALP govt.; if you have not noticed we have a baby boomer bubble or bomb that has been distorting segments of the economy and elections, by their demographic dominance i.e. above median age vote, not ‘immigrants’.
That is a fair call – not only a disappointment but a waste of political opportunity and goodwill.
A modest super profits tax levied 12 months ago had popular support and could now be used to mitigate the harsh effects of fuel price increases and cost of living pressures generally. Sadly, now in the wake of the Voice debacle the opportunity may have been lost.
Albo’ slack of courage and indeed, anything, now sees the WAP Labor govt under pressure! By the end of 2024 what will be their achievements?? Yes they are more competent than Scomo’s spivs and shocks! Great!
Any economic theory that can only work by making millions of poor people poorer is a crock. Its a system for billionaires. We dont need such a system. We need better economists and politicians.
In other more significant economies which we follow like the UK i.e. the US, it’s ‘Kochonomics’ and its muse James Buchanan, who was known for good reason as ‘segregation’, ‘radical right libertarian’, ‘deep south’, ‘planter’ or ‘free market’; WASP eugenics, tax cuts etc. for the <1% masquerading as socioeconomic policy.
The Atlantic: ‘The Architect of the Radical Right. How the Nobel Prize–winning economist James M. Buchanan shaped today’s anti-government politics’ By Sam Tanenhaus July/August 2017
Increasing interests rates raises the costs of everything – aka inflation.
This will be cured by…err.. increasing interest rates.
Ross Gittins used to be an accountant and then gained an economics degree to become the only sane and trustworthy financial columnist.
As exABC reporter Peter Martin said (on RN) last week, “economists are not accountants and often aren’t that great at arithmetic.”
They thus join lawyers in the definition “that a bus full of both going over a cliff with any empty seats would be sad waste of space.”
Not when he suggests the faux centrist environmental trope of ‘degrowth’, plus his focus on population and recent immigration; informed by fossil fuel astroturfing for 99% to tighten their belts, but not the <1%, i.e. ‘greenwashing’, but too easy locally.
Gittins was right on the money highlighting how the absurdly high migration rate is pushing up demand; ergo inflation.