Australia is engaging in a damaging economic blame game

Treasurer Jim Chalmers was spot on when he bemoaned that high interest rates were “smashing the economy”. And the peanut gallery’s view that Chalmers was attempting to divert blame to the Reserve Bank contains a kernel of truth.

But that is about where the sensible narrative on this story stops.

Treasurer Jim Chalmers has repeatedly defended his remark that high interest rates are “smashing the economy”.Credit: Alex Ellinghausen

Informed debate on the economy has been overtaken by populist rhetoric feeding an overblown distrust of institutions, including corporations and institutions such as the Reserve Bank of Australia.

The government can be rightly accused (in part) of falling captive to this. Blaming supermarkets for profit gouging without any evidence is a case in point.

The normally temperate chief executive of the Commonwealth Bank, Matt Comyn, made his frustrations clear last week when he decried Canberra’s performative populist politics.

He said voters were being presented with a “false dichotomy: for a company to earn any sort of income or profit, it is often inferred or related … as somehow being unjustly extracted from consumers”.

Higher interest rates are the bitter pill that the community and businesses need to swallow to return to economic health.

In reality, the post-COVID-19 wave of inflation was an international phenomenon resulting from understandably fearful governments and central banks around the world hyper-stimulating economies.

Inflation is the worldwide hangover. And higher interest rates are the Panadol for the headache.

But those who conclude that Chalmers is picking a fight with his hand-chosen Reserve Bank governor, Michele Bullock, have landed in the wrong place.

The treasurer is correct in calling out that he has regularly referenced the pain of interest rates on the economy and, more particularly, on the community.

Reserve Bank governor Michele Bullock is doing the necessary but dirty work required to fight inflation.Credit: Alex Ellinghausen

He also knows that Bullock is doing the necessary but dirty work required to fight inflation.

The fact is that it is the central bank that sets interest rate policy.

His job, in effect, is to be the chief executive of the economy, and to make a crude analogy, Bullock is more akin to its outsourced chief financial officer. I guess that makes Albanese the chairman.

The trouble is Chalmers is a politician and a salesman. That’s tough when he knows that we are on the cusp of receiving data showing the economy grew as low as 0.1 per cent in the three months to June 30. That is a hard sell.

On the one hand, his use of terms such as “smashing” or “hammering” regarding the impact of high interest rates on the economy, clearly suggests they are a bad thing.

On the other hand, using higher interest rates to slow the economy is one proven antidote to inflation – and entrenched inflation is an insidious scourge that depletes long-term economic health.

Higher interest rates are the bitter pill that the community and businesses need to swallow to return to economic health.

With his salesman hat on, Chalmers is handing out a bit of sugar to struggling households in the form of relief on energy bills and rental payments.

The Reserve Bank is a large target for the community that is feeling the pain of higher interest bills, and from a political perspective, the government surely would like to fight an election at a time when rates are falling.

But all the indications from the Reserve Bank are that this won’t happen this calendar year.

The good news is that in the lead-up to next year’s election (assuming it is in May), we are more likely to see the start of an easing in monetary policy.

And the weak GDP numbers to be released on Wednesday will probably also remove any lingering prospect of another interest rate rise this year.

When rates begin to fall, people will remove Bullock’s photo from the centre of their dartboards, and there will be no blame game in which to indulge.

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.