While at a micro level homeowners will be sweating on today’s Reserve Bank interest rate decision, hoping for no movement, there is no good news whatever happens.
If rates go up it will be the 11th consecutive rise since May last year. The only respite came in the month of January, because the RBA doesn’t meet then. The banks will quickly pass on the increase, meaning that mortgages will go up.
However if rates don’t move, as some are now predicting because of lower than expected inflation numbers recently, that’s a sign the economy is slowing courtesy of all the rate increases before now. A slowing economy is bad news at a macro level, even if it’s a necessary evil to address high inflation.
The RBA has been putting rates up precisely in the hope of slowing the economy, as a means to put downward pressure on inflation. It has had no choice. That’s its role, in many ways its only role.
Solving the inflation problem only happens by risking another problem: a recession. Even if recession is avoided, any slowdown can be problematic because it usually causes a spike in unemployment. Businesses claim this risk is heightened by demands that award wages and the minimum wage rise by seven per cent, which is what the ACTU is now calling for. The unions say so what, people need the extra money to survive.
If the RBA persists with another interest rate rise today it will be defying the wishes of the political class. While the RBA is officially independent of government, its board is government appointed, and the government is making it quite clear that it has concerns about the pain rate rises are causing for many Australians.
A pause in rate rises also doesn’t guarantee the upward trend is over. If inflation stays high the RBA will be forced to revisit the issue and keep putting rates up. Seeking to further dampen spending because too many of us aren’t getting the message that we need to tighten our belts more than we already are.
The tragedy of where the economy is now at is that lower socio-economic cohorts within the community are doing it the toughest. For them, tightening belts isn’t always an option because they are already struggling to make ends meet.
Having been encouraged to borrow to buy homes, there are many Australians with mortgages they can’t really afford as rates normalise.
For anyone who hasn’t been able to get into the property game, rate rises sting them too because the homeowners pass on the extra costs as rental increases. These hit already strained family budgets at the exact same time as goods and services are also dramatically increasing. That includes energy prices, which Labor told us in a moment of pre-election rhetorical overreach would be coming down.
The only good news at the moment is that unemployment remains low, which means people can continue to scrape by with pay packets containing to arrive on time. If jobs start to be lost, however, that changes. It’s a delicate balance.
Peter van Onselen is a professor of politics and public policy at the University of Western Australia and Griffith University.
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