Mortgage holders feel Lowe blow in RBA’s war on inflation

RBA Governor Philip Lowe. Picture: Getty Images

Today’s fifth consecutive rate rise is a body blow to mortgage holders, but it will be welcome news for savers, assuming banks pass on the increase to savers not just those burdened by a mortgage. They often pass on the full cash rate hike to those with a mortgage but only partially increase the interest rate on savings accounts.

Why doesn’t everyone love the banks?

Either way, the purpose behind the latest rise is simple: a desperate bid by the Reserve Bank to curb rising inflation which is jamming all Australians when it comes to cost of living. Remembering that at the end of the month the halving of the petrol excise comes to an end and Covid payments will also half.

In the short to medium term those with a mortgage will see cost of living pressures rising on multiple front – as household goods rise in cost with inflation, and as their interest repayments on loans also rise. And don’t forget rents usually go up when investment loan repayments go up.

The RBA won’t mind that people’s financial burdens are increasing because the consequence will force people to spend less – the hope being that less spending will put downward pressure on inflation by taking the heat out of demand and therefore the economy.

The ever-present danger of course is that any contraction in the economy becomes too swift and too brutal, leading to a wider economic downturn, possibly even a recession.

This is a real threat in most countries, but less so here in Australia. In the United States it even seems to be a desired policy outcome, if you can believe that!

Closer to home our politicians will continue to trade barbs about rising rates – which did start during the election campaign, while the Coalition was still in office. You can hardly blame a new government for the follow-on rate increases when it still measures its time in office by months not years.

But the October budget and how it is calibrated will have a bearing on what happens with rates into the future.

While we know the RBA sets monetary policy, the fiscal policy settings of government play a role in monetary policy decision making. If governments stimulate the economy counter to the RBA’s monetary policy goals, it can put upward pressure on cash rate decision making which might not otherwise have been the case.

But the real wrath of voters should be reserved for the RBA Governor Philip Lowe, not politicians of any shape or size. Lowe assured Australians that rates would not rise until 2024. Talk about a poor prediction with profound consequences for most voters. Some people no doubt decided not to fix their mortgages when they otherwise might have done so, heeding the words of the man in charge of monetary policy. Assuming he knew what he was talking about and had some grasp on what the future held.

In the end he did not. Which begs the question why he felt the need to make such a prediction in the first place.

Peter van Onselen is a Professor of public policy at The University of Western Australia and Griffith University.