Waiting for the Reserve Bank of Australia: political bravery needed because rates must rise soon

With inflation of 5.1 per cent and the Reserve Bank’s policy rate at 0.1 per cent, the real rate is minus 5 per cent. Above, the RBA building in Sydney.

In my time there have been two standout acts of political bravery – maybe indeed crazy-bravery – which put the national interest ahead of narrow political advantage and which resonate into the current media frenzy over a Reserve Bank interest rate hike in the middle of an election campaign.

Two that is, putting aside Gough Whitlam’s across-the-board 25 per cent tariff cut to both fight the inflation his government had caused and to embark on the serious structural reform that would play out through the Hawke-Keating years of the 1980s and culminate and indeed terminate with Howard and Costello through the 1990s.

It is just too complicated to characterise the tariff cut purely as political bravery; it was driven by desperation married to ivory tower theory, and Whitlam & Co actually saw the lower prices for consumers as a vote-winner. Never mind the bodies.

Let me say upfront in relation to rates today, has everyone – and I include the RBA board and management – lost touch with reality? We are talking about moving the RBA’s official rate away from zero? OK, so as not to ‘‘do an Albo’’, 0.1 per cent.

If the RBA does what it should do and lifts it to 0.5 per cent, on what planet in what universe could that be considered anything other than still softer-than-soft? With inflation at 5.1 per cent?

It would still be a negative real rate of 4.6 per cent.

With the standard home loan rate going up to around 2.5 per cent, borrowers would still be getting their money at a significant negative real rate.

Yes, it should and must go higher. But what? We can’t lift it from 0.1 per cent even just to 0.5 per cent, because that’s the first step to a still softish 2 per cent? So better not take the first step? What, ever?

It was a very different world in the late 1980s, when we had a Treasurer, Paul Keating, actually urging the RBA to hike and to keep hiking; and at much, much higher rate levels. Between January 1988 and March 1989, the RBA took its then policy rate from 10.6 per cent to 16.5 per cent.

Now yes, inflation back then was much more entrenched and it was higher than today. But not that much higher; in the second half of the 1980s it ran at around 7-9 per cent.

Just note the comparison.

Back then inflation, say, 9 per cent, the RBA’s policy rate 17 per cent. A real rate of 8 per cent.

Now, inflation of 5.1 per cent, the RBA’s policy rate 0.1 per cent. A real rate of minus 5 per cent.

Keating was not intending an act of selfless political sacrifice, and he certainly wasn’t doing it in the heat of an election campaign. He wanted the hikes out of the way by the second year of the term, with rates falling and falling rapidly running down to the March 1990 election.

That was intended, by Keating, to be Bob Hawke’s last as leader.

He wanted inflation done and dusted and rates back below 10 per cent, on the way to his election in 1993.

Nevertheless, it was extraordinary for a Treasurer to be exhorting the RBA to raise rates so punishingly – the standard home loan peaked, albeit only briefly, at 17 per cent.

It did send the economy into recession; it did send the jobless rate to 11 per cent; but it did set the basis for wringing inflation out of Australia for the first time since the 1960s.

And most pointedly of all, it should have turned into a quite spectacular act of putting the national interest ahead of personal political advantage.

Keating should have lost the 1993 election; and he would have, except that he “got his one John Hewson”.

The second and even more striking act of potential political self-sacrifice came in 2000 when Howard and Costello gave us the critical reform of the GST.

This was not just a reform which gave the states for the first time a significant tax base beyond their messy 19th century-style taxes, but it cleaned up a plethora of inefficient federal and state taxes at the same time.

It was an exercise which should have been repeated by the Rudd government – as identified but not articulated by Treasury secretary Ken Henry: that lifting the GST to 15 per cent could have completed the job of sweeping away up to 100 even more inefficient taxes and fees.

Understandably it didn’t happen, when the Rudd government got ambushed by the GFC and a megalomaniac called Kevin.

Nevertheless, what Howard and Costello did was truly extraordinary.

Bringing in a new tax for which they received all the political odium – and yet handing almost all the revenue over to the states!

Again, it should have been an exercise in putting the national interest ahead of personal political advantage. Howard should have lost the 2001 election and in my judgment, he would have but he “got his one 9/11” and his “one Tampa”.

The GST caused inflation to spike to 5 per cent, but then RBA governor Ian Macfarlane “looked through’’ the one-off leap.

He did so with an official interest rate at 6 per cent.

And it was an interest rate which he had just raised, in May 2000, by 25 points.

Interestingly, he had raised because of petrol prices – critically because higher petrol prices fed into higher business costs. Hmm, sound familiar?

Between 2000 and now, inflation only hit 5 per cent once more; in late-2008, ironically just as the GFC exploded.

Importantly, then governor Glenn Stevens had been raising the RBA’s official rate, progressively, for more than two years in anticipation of the rising inflation. And again, in contrast to today, he had started from 5.5 per cent, going as high as 7.25 per cent.

Sort of puts today’s frenzy around 0.5 per cent in context, doesn’t it?