RBA rates hike focuses on getting fundamentals right

Not all economists were shocked by the central bank lifting the cash rate by 25 basis points to 3.85 per cent on Tuesday. On Monday, several economists told mortgage holders, through The Australian, not to rule out a rate hike. While financial markets believed there was virtually zero chance of such a rise, Lowy Institute senior fellow and former Reserve Bank of Australia board member John Edwards told Patrick Commins that inflation remained too high for the board to be complacent. EY chief economist Cherelle Murphy said accelerating wage pressures as workers chased pay rises in line with the increased cost of living and the turning of the property market suggested the RBA’s job was not yet done. “It’s not clear at all that the inflationary pressures have dissipated,” Ms Murphy said. “I wouldn’t put it past the RBA to put in a bit more insurance because the sooner it does it, the more effective it is.”

That was the board’s reasoning. In his statement after Tuesday’s meeting, RBA governor Philip Lowe said inflation in Australia had passed its peak but at 7 per cent was still too high and it would be some time yet before it was back in the target range of 2 to 3 per cent. “High inflation makes life difficult for people and damages the functioning of the economy,” Dr Lowe said. “And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment.”

Next Tuesday, the Albanese government needs to do its part in the budget by keeping spending growth modest. Jim Chalmers has promised cost-of-living measures to ease the strain of living costs but as Judith Sloan wrote on Tuesday, the government should be wary of bowing to the pressures of lobbyists demanding increases in some welfare privileges and payments, especially for single parents, most of whom do paid work and who grasp that the best form of welfare, for themselves and for setting their children a good example, is a job.

Plenty of jobs are available and childcare support is generous.

As economist Chris Richardson said on Tuesday, the government would be making a mistake to use the cover of an unparalleled commodity boom to bake in extra spending that would create future problems. Despite the hard-luck story he likes to tell, the federal Treasurer is the beneficiary of the lowest unemployment in 50 years, bequeathed by his predecessor, Josh Frydenberg, who also factored in conservative returns for commodities – gas, iron ore and coal – that have proven yet again that they are the backbone of the nation’s economic strength.

Yet serious fiscal challenges lie ahead, which is why spending restraint and productivity must remain the government’s focus. Impressive as it was, the firepower outlined in the Defence Strategic Review will be funded on the other side of the forward estimates. Peter Dutton, to his credit, has said he would back a tough budget to pay for the AUKUS subs. We agree with him that in the current environment, cranking up work-for-the-dole would make sense. The National Disability Insurance Scheme and aged care both need tough decisions. Taxes on the economy’s heavy lifters are too high.

In view of falling but ongoing inflation, retailers such as Coles, Woolworths, Kmart, Harvey Norman and Amazon have ­made a sensible call in revising their position on minimum-wage increases, calling for a 3.5 per cent rise from July 1 rather than the 3.8 per cent rise they backed in April. As Dr Lowe said in his statement, unit labour costs are rising briskly but productivity growth is subdued: “Wages growth has picked up in response to the tight labour market and high inflation. At the aggregate level, wages growth is still consistent with the inflation target, provided that productivity growth picks up.” The upcoming round of workplace reforms should factor that in.