Labour, Liberal Party ignore looming rate hikes, inflation pain during election campaign: Robert Gottliebsen

Australians appear in the dark about the interest rate turmoil that lies ahead. Picture: Dan Himbrechts/AAP Image

In the hours leading up to the first leaders’ debate, Commonwealth Bank five year Australian dollar bonds were being widely offered in parcels as low as $10,000 at an interest rate of 4.48 per cent – a rate that indicates mortgage interest rates are set to more than double.

And yet in the debate, neither Scott Morrison nor Anthony Albanese wanted to discuss the interest rates/ inflation issue that is set to dominate the term of office who ever becomes the 31st Prime Minister. The fact that no one in the audience raised the issue indicates Australians don’t realise the interest rate turmoil ahead.

It’s true that the mortgage rate pressure from bond rates is reduced because the bulk of CBA funds come from deposits which rank before bonds and are currently costing the bank only token interest rates.

But the interest rate game is dramatically changing because of higher US interest rates and Australia’s ballooning inflation rate. The Australian CPI index in the December quarter rose at an annual rate of 5.2 per cent so the CBA bank’s 4.48 per cent bonds, on current inflation rates, were in fact giving a negative return after adjusting for inflation. For bank depositors that negative return rate is monumental.

In the debate, Albanese declared that what was missing in the Australian economy was higher wages. And, of course, he is right – wages in many areas have not kept up with inflation. Albanese, with the help of the unions, wants wages to rise at a much faster clip so boosting both inflation and mortgage interest rates. Higher productivity is not mentioned.

But Morrison was very careful not to come back with a rejoinder based on the mortgage rate pressure that higher wages will create. That would expose the fact that the Reserve Bank over stimulated the economy in the light of the big government deficit. Part of that stimulation was generous credit given by banks which pushed up the dwelling prices and made many vulnerable to mortgage rate rises.

As I have pointed out many times, the CBA knows the housing market better than any organisation in the country because it is the largest home lender.

CBA is forecasting that the Reserve Bank will only lift its rates by 1.25 per cent taking the mortgage rate to around 3.25 per cent. The CBA says that if mortgage interest rates rise to around 4.5 per cent, as the CBA bond sale indicates, they will have a catastrophic impact on the economy with house prices falling sharply.

Albanese will try and lift the wage rates and therefore the inflation rate via union pressure, Fair Work determinations and higher wages for Commonwealth employees starting with age care workers and spreading through the public service. Industry will resist but if Albanese is successful then higher wage costs will multiply the cost pressures coming from imports, fruit and vegetables and energy

Given the prosperity in large areas of the economy those cost rise will be quickly passed into prices.

Almost certainly, the Reserve Bank will try to limit its official interest rate increase to around the 1.25 per cent level. But in the US, the Federal Reserve will have no such constraint because it’s residents are not as exposed to the Australian level of housing overborrowing. I don’t think it’s sustainable in the longer term to have Australian interest rates substantially below the US.

The only political force discussing interest rates is Clive Palmer and Bert Kelly in the United Australia Party. They want to curb mortgage rates at three per cent, which represents about a one per cent rise. Such a clamp would slash bank profits and restrict the availability of bank finance to housing causing a fall in dwelling prices. But again it is not being debated.

The share market in both the US and Australia is strong because there is a boom in parts of the economy boosting the profits of those companies who know how to ride it. In Australia, higher agricultural and mineral prices further stimulate share markets.

The share market believes that the big rise in US interest rates that is looming will provide short sharp medicine and bring American inflation rates down from their current 8.5 per cent level to a more acceptable rate.

Australian share traders think that if that happens the Reserve Bank will get away with increasing interest rates by only 1.25 per cent.

Leaving aside the politics, we are seeing the Ukraine war push up the cost of energy and food. China developed inferior vaccines which has lifted its exposure to Covid. Its shut downs are boosting costs and creating shortages. In Australia, we have abandoned the so called piece work in harvesting fruit and vegetables which later in the year will further accelerate the cost of food.

I want to emphasise that I understand the cost of living pressures on a vast number of Australian families who need wages rises. I would hope that as the campaign progresses both leaders will start to be honest with the Australian people.

But they won’t because that would force both to tell Australians that we are reaching the end of this massive spending spree and therefore there will need to be restraint in government spending.