RBA pause gives Albanese time to refocus on costs

Treasurer Jim Chalmers. Picture: NCA NewsWire / Martin Ollman

Given the emerging signs of rising distress among borrowers and the uncertain economic outlook globally, new Reserve Bank of Australia governor Michele Bullock has done the right thing leaving the cash rate on hold. Mortgage holders are not the only ones heaving a sigh of relief. The Albanese government, too, has been given more time to get its mind back to where it should be, on the issue that is front and centre for most voters – cost of living. With Anthony Albanese and his government inevitably distracted by a referendum contest that is not going as planned, extending the interest rate pause has given them more time to prepare for the real battle that must be fought. Like Ms Bullock, Jim Chalmers no doubt is looking with trepidation at the potential economic headwinds gathering around the world.

A sense of policy confusion exists about whether more rate increases will be needed, both in the US and Australia, to further contain inflation that again is being fanned by higher oil prices. The rising price of oil is being driven by co-ordinated action by Saudi Arabia and Russia to curb production. Higher prices help Vladimir Putin fund his war effort despite sanctions imposed by the West. The added complication for Australia is the growing weakness in the value of the Australian dollar against the US dollar that will add to inflationary pressures down the track. In recent days the Australian dollar has started to test limits that suggest higher rates may be necessary. This is a problem that will get only worse if the US dollar continues to strengthen, driven by surging Treasury yields that reached a 16-year high on Monday as investors grow more convinced the US Federal Reserve is likely to keep borrowing costs higher for longer than it would do in a typical business cycle. As The Wall Street Journal has noted, the combination of those higher rates, a stronger US currency and elevated oil prices spells lower growth across the world and more financial vulnerability. The outlook for Australia is made more uncertain still by what Ms Bullock says is a high level of uncertainty over the outlook for the Chinese economy because of ongoing stresses in the property market.

Announcing her first decision as governor to hold rates steady at 4.1 per cent, Ms Bullock said the RBA believed monetary policy was at “restrictive levels”, but she also made it clear that the central bank was prepared to raise rates again if need be. Since the RBA started raising rates in May last year, the official cash rate has increased from 0.1 per cent to 4.1 per cent, adding more than $1350 a month to an average $600,000 mortgage. With rates on pause, attention must focus on what the federal government is doing to assist. The international factors are largely outside the government’s control. But, as interest rate increases already in the system continue to bite, the government must demonstrate that its focus is on the big issues that matter to voters.

Top of the list are energy prices and the rising cost of living. Attempts by Resources Minister Madeleine King to inject some much-needed reality into the future gas market is welcome. Climate Change and Energy Minister Chris Bowen must demonstrate the same sort of pragmatism to get the broader energy transition back on track. Voters know the promise of lower electricity prices made during the federal election campaign will not be delivered. Experience shows the net-zero experiment is inflationary across a broad front and is losing the support of voters in countries that are further ahead in the transition than we are. Most of all, the Albanese government must reconsider its union-driven changes to industrial relations that are already lifting prices and will only worsen an already tight labour market, keeping interest rates higher for longer than they otherwise would be.