Rates rise will focus voters on serious economic issues

Some commentators regard the timing of Tuesday’s interest rate rise as unfortunate. But the cloud could have a silver lining. Less than three weeks from the May 21 election, it will focus voters’ attention on why basic economic issues and competent economic management matter. Peripheral issues need to fade into obscurity. Many voters flirting with the idea of supporting Greens, teal independents or other bit players with no economic policies to speak of are also paying off homes. Because this is the first rise in rates for more than 11 years, making do to cope with higher repayments will be a new experience for many Australians, especially younger borrowers. The increase will focus their minds. It will lift the cost of $750,000 mortgages – modest in the current real estate market – by more than $100 a month. Should the cash rate reach 2 per cent, which is highly likely, that same mortgage will cost another $817 a month; an extra $10,000 a year. Reserve Bank governor Philip Lowe made it clear Tuesday’s increase is just the start: “Over time it is not unreasonable to expect interest rates would get to 2.5 per cent,’’ Dr Lowe said. The RBA board was committed to doing what is necessary to ensure inflation in Australia (5.1 per cent) returns to target (2 to 3 per cent) over time: “This will require a further lift in interest rates over the period ahead.’’

About 40 per cent of mortgage holders are believed to have locked in loans on fixed rates. But they know the era of rising rates could last well beyond the time their fixed loans expire. In the next 17 days, the question of which major political party to trust to manage the economy will increasingly be front and centre, especially for homebuyers and those paying off business loans while also paying staff and meeting business overheads. Whichever side wins office will face a balancing act, complicated by the unknown, international factors, including the impact of Russia’s Ukraine invasion on supply chains, Covid-19 disruptions, especially in China, and consumers’ declining purchasing power from inflation.

Encouraging growth, which the bank tips to fall from 4¼ per cent over 2022 to 2 per cent over 2023, will be an important challenge. On the positive side, it expects the unemployment rate to decline to around 3½ per cent by early 2023 and remain around that level, the lowest for 50 years. Household and business balance sheets are generally in good shape, the bank noted. An upswing in business investment is under way. A large pipeline of construction work has begun.

After subdued wages growth in 2021, it is picking up pace amid labour and skills shortages, the bank noted. To some extent, that reality blunts the opposition’s push for even higher wages. It is vital wage breakouts, like those driven by militant unions in the 1970s and 1980s be avoided. They would destroy businesses, jobs and growth. Given the size of the construction sector, its role in building productive infrastructure, and the need to contain inflation, the opposition, regardless of union pressure, should ditch its plan to scrap the Australian Building and Construction Commission. After the RBA’s inaccurate forecast that it would leave interest rates on hold until 2024, the rise was no surprise. As Dr Lowe said: “Inflation has picked up significantly and by more than expected.’’ It should be the turning point of the campaign. While Jim Chalmers flaps about the “triple whammy” of rising inflation, living costs and interest rates, Scott Morrison is underlining the resilience of the economy. The side that shows it is best equipped to deal with the new conditions will gain momentum.