The RBA has to dole out pain. Not everyone can be a winner here - The Centre for Independent Studies
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The RBA has to dole out pain. Not everyone can be a winner here

This week’s news that inflation had risen for April was no doubt an unwelcome, and somewhat unexpected, shock to many in Canberra.

Calmer heads will no doubt observe that the CPI only rose by 0.1% (from 3.5% to 3.6%), albeit the second 0.1% increase in a row. Nor is inflation at the levels seen at the peak of the latest crisis, having reached almost 8% in late 2022.

Regardless, it is clear inflation remains troublingly high.

The RBA continues its ‘wait and see’ approach, giving little away on the future direction of interest rates. While caution is undoubtedly a good thing in a central bank, the RBA is developing a reputation for being late and slow when it comes to inflation issues.

The recent RBA review found that both during the late 2010s when inflation and growth were under target, and again during the ramp up of inflation during late 2021 and throughout 2022, the RBA was slow to act.

Indeed, one could argue the RBA’s decisions in 2021 and 2022 made things worse, not better.

First, they sustained expansionary monetary policy well intothe second half of 2021 (when other major economies had already started to ‘turn the taps off’). Second, they did not begin raising rates until May 2022 (when the UK had raised rates the previous December and the US had started in March).

Of course, there are considerable pressures lining up against the RBA in this battle.

For a start, the government has made it abundantly clear it does not want the RBA to raise rates. The Treasurer has been keen to talk up the falls in inflation, arguing that the previous increases in inflation didn’t justify rate rises, and even predicting future rate cuts.

Not only has the government indicated its bullish view on inflation, it has also decided the fight to tame inflation is subordinate to their political program.

The full extent of the government’s contribution to getting inflation under control has been accounting tricks with the measurement of CPI (such as its recent energy bill payment)and not spending all the (clearly temporary) revenue surge of the past two years.

Meanwhile it has not deviated course one iota on its longer-term spending plans. As was made clear in the recent budget spending, which was expected to be basically flat in real terms in 2023-24 and 2024-25, but will now increase by more than 4% this financial year and at least 3.5% next financial year.

The government has found billions of taxpayer dollars for its resuscitation of the failed policies of industry assistance, too.

Any moderation in spending is pushed out to the end of the forward estimates, where you can safely bet it will be revised upwards to accommodate new spending commitments during and after the election.

Nor has the government tempered its industrial relations agenda, which involves significant pay increases across a growing number of sectors and the clearly inflationary positioning that workers’ wages should increase in line with inflation by right.

While it is undeniably true that the role of managing inflation in the economy rests primarily with the RBA, that doesn’t mean the government can simply do whatever it wants. This is especially true when its policies are actually contributing to underlying inflation, and it’s putting public pressure on the RBA not to do its job either.

However, it is not merely the government that is opposed to further interest rate increases — and this is where things get tricky.

The public was absolutely furious with the RBA for the rate hike cycle that began in May 2022. Whether or not you take the view that the previous RBA Governor promised not to increase interest rates, the overwhelming majority of mortgage holders did not expect or plan for interest rates to increase so far and so fast.

This is the real dilemma facing the RBA: while expert opinion largely believes it did too little and started too late, most of the public believes it did far too much too quickly.

And to make matters worse, the impact of these rate rises has not been felt evenly.

Those with a large mortgage — largely recent home buyers and so more likely to be younger — have seen their mortgage payments increase by hundreds and even thousands of dollars per month.

Similar impacts have been felt in the rental market.

However, people who already own their home outright, or have a small mortgage, have been far less affected by the rate rises. Disproportionately these people are older – typically at least 50 and usually 60 and over.

Indeed, rising interest rates isn’t always a bad thing for this demographic. For example, those living on the proceeds of superannuation might see an increase in their investment returns.

As a result, this demographic group has continued to spend heavily; sustaining inflation in the face of the rate rises and significant belt tightening from younger Australians.

While the impact of rate rises on business investment will eventually temper both inflation and economic growth in the medium term, the short-term effect of continuing rate rises is to hammer the group who have already curtailed their spending.

In the end the issue is — and always has been — how to allocate the pain that necessarily comes with bringing inflation back under control.

Unfortunately, as a society we seem to have lost the ability to rationally discuss policy decisions that have winners and losers, preferring instead to live in a fantasy land where everyone can be a winner all the time.

Meaningful reform will remain impossible as long as this sentiment persists.

Simon Cowan is Research Director at the Centre for Independent Studies.