RBA interest rate cut needed for middle Australia under pressure

Some directors in Queensland believe the late swing to the former ALP government was triggered by a series of cost of living reduction promises. Picture: Ian Waldie/Bloomberg via Getty Images

Australia’s cost of living crisis has taken a nasty turn and the Reserve Bank needs to be aware of this new development.

The cost of living phenomenon is now moving into parts of middle-income Australia because they have run down their savings. They are not coping well with a family crisis they never conceived would happen to them.

I picked up this change among many middle-income Australians from a surprising source – by talking with directors of some top ASX 100 companies.

To date, most in the director community have been fully aware of the crisis among lower-income people with mortgage and rent stress. Directors of some retailers saw the crisis reflected in their trading patterns. But there was a remoteness. It’s not in my backyard.

The latest deepening of the crisis creates a different situation. Directors and top managers are seeing the crisis reflected in significant portions of their staff who have now taken to reducing their food intake because of the cost of living pressures.

Some come to work without breakfast. The reduction in food intake and the worry of the cost of living pressures have caused some to lose weight.

The definition of essential expenditure in middle Australia is often different to low-income Australia. In many areas private education, particularly secondary education, ranks ahead of food.

The directors and managers are fully aware that this may affect work performance. Some companies now serve breakfast to staff.

This is also intensifying the reluctance of companies to increase prices. Naturally, restaurants and cafes are under pressure and many restaurants now have a lower food choice because people are not prepared to buy more expensive dishes. In previous economic crises most restaurants and cafes received large amounts of cash and paid their workers in cash. They used this illegal behaviour to insulate the enterprise from the crisis.

In 2024 the use of cash by customers has slumped and workers are now paid their entitlements.

While this is a good thing for the community (and the ATO) it reduces the ability of restaurants to adapt to the situation and many more will close than in previous slumps.

This total situation is, of course, exactly what the Reserve Bank has been aiming for because it’s only when enterprises feel the crisis that non-government-induced price rises stop.

Normally this would have occurred much earlier but federal and state government energy industrial relations policies, high spending and other government-driven cost-boosting activities have prolonged the agony, causing it to seep into the middle-income area.

The directors I speak to believe that in Queensland the late swing to the former ALP government, which avoided an electoral wipe-out, was triggered by a series of cost of living reduction promises.

Many voters in seats around Brisbane are desperate for help so voted for the party that offered the most relief. Voters under pressure in other state capitals (apart from booming Perth and perhaps Adelaide) will act in the same way.

Treasurer Jim Chalmers is telling the community he will not go on a pre-election spending spree to relieve the cost of living pressure. Peter Dutton also has no intention of taking that path.

If there is no cost of living relief via other directions – such as lower interest rates – the winner of the next federal election may be the party that relents and gives the most relief to the cost of living crisis.

Of course it’s ironic that the federal government would provide relief to offset the results of its own policies and those of ALP state governments.

Governments have been thwarting the Reserve Bank’s intention to restrain prices, but the latest data, released on Wednesday, showed that inflation fell slightly to 2.8 per cent, in line with expectations.

But there is a new factor that has the potential to maintain Australia’s inflation rate.

In the last month the Australian dollar has fallen from around US69c to around US65c.

A key factor is, of course, the rise in the US dollar which is triggered by the policies of both presidential candidates.

Trump is promising a rise in tariffs and an increased deficit. Harris is promising a spending spree with an enormous rise in the deficit. Both will need to borrow large sums on the markets.

US bond interest rates are rising despite a slowing in many parts of the US economy. That reduces our ability to lower rates because of the adverse impact on our currency. In addition, shipping costs are rising dramatically.

Those external situations will make the Reserve Bank cautious about lowering interest rates at the November meeting.

But if it doesn’t lower the interest rates, it may force politicians into relief subsidies that will thwart future interest rate reductions but deliver government for the next three years.

This is a particularly dangerous situation for the nation.