Path to lower interest rates is difficult and uncertain

Divergent opinions between Treasury and the Reserve Bank of Australia over economic forecasts are nothing new. Neither is infallible, as long and, for many people costly, experience shows. But the minutes of the RBA’s monetary policy meeting of May 6-7, a week before the federal budget was handed down, confirm what many economists have argued: that Jim Chalmers took a gamble in the budget, basing decisions on Treasury expectations that inflation could fall into the 2 to 3 per cent target range this year – a year ahead of what the RBA was expecting. “Inflation is expected to be lower, sooner,” the Treasurer said in his budget speech. In contrast, the more sober assessment contained in the RBA minutes, released on Tuesday, gives household mortgagees and business borrowers, struggling with debt repayments after 13 interest rates rises, cause for concern.

While the RBA board decided to hold the cash rate at 4.35 per cent, it considered a 14th rise in rates. This may be required in future, the board agreed, dashing hopes of significant interest rate falls in coming months. Productivity improvements will be needed, the board confirmed, a glaring issue the Albanese government and the Fair Work Commission need to address for the sake of workers’ living costs in paying off homes and renting, and for the economy in general. A higher cash rate might be required, even with ongoing weakness in demand, the board noted, “if trend productivity growth turned out to be weaker than assumed, unless wages growth were to moderate in response”.

Opposition Treasury spokesman Angus Taylor was on the right track in his budget reply address at the National Press Club on Wednesday when he said the Coalition would put productivity, which barely rated a mention in the budget, and per person GDP growth at the centre of its economic strategy. It would reverse the Albanese government’s changes to the definition of a casual employee, for example. That would be a good move because higher productivity allows for higher wages without inflation. More initiatives to lift productivity will be needed from both sides of politics.

Facets of the economy are slowing. More than 900,000 Australians are relying on jobless welfare support payments, Geoff Chambers reported on Wednesday. The total has spiked by more than 75,000 since last September, when it reached post-pandemic lows. Young people have been hardest hit. If the trend continues, it will add to social security spending as a drain on the budget, as well as exacerbating social problems caused by unemployment and underemployment.

More ominously for jobs and growth, research commissioned by Energy Consumers Australia and the Council of Small Business Organisations Australia reveals one in three small businesses is reporting severe financial hardship and struggling to pay power bills. Interviews with more than 400 small business operators revealed many were being hammered by high energy bills. The analysis, focused on small businesses’ experience of the transition to net-zero emissions, found more than one in three small to medium enterprises had experienced energy hardship in the past year that was worse than the impact of post-Covid lockdowns.

The government response to that problem, $300 non-means-tested energy rebates, with more for small businesses, is blunt and wasteful. Much will depend on how recipients spend the money, as well as largesse being doled out in fiscally irresponsible states. A day after the budget, Energy Minister Chris Bowen said the $300 in relief for every household was an attempt to buy lower inflation and put pressure on the RBA to cut rates. That is debatable, economists say. Tackling problems from the net-zero transition driving up power prices would be more effective.