Is the RBA about to torch the mortgage belt to punish the top end of town for spending too well?
Two economies are living under one roof and only one of them is feeling the RBA’s interest rate pain, which is exactly why today’s rate call is such a nightmare to picture.
The RBA decides on interest rates at 2.30pm today and it has a difficult decision, if you consider what economists are thinking. However, they don’t all hold the same view and though they’re trained to know the economy, our economy is changing all the time, so what might have worked ten years ago might not be relevant now.
For example, I have a theory that we have two economies operating right now. One group doesn’t have a mortgage and are not paying rent made up of older and younger Australians, who are untouched by the RBA’s interest rate rising policy.
They’re aided and abetted by aspirational first homebuyers or upgraders, who are on an income roll and therefore are not currently negatively affected by the high interest rates and the Albanese Government’s Budget tax changes.
They might have even driven through the Iran war period of higher petrol prices because they’re on a good income situation. In simple terms, these people are frustrating the RBA’s fight against inflation by paying high prices for property, meals out, business class flights, expensive material items and new cars!
In contrast, there are the mortgage belt borrowers who are enduring the RBA’s interest rate pain. For these people, the high interest rate pain is now being made psychologically tougher because experts are saying to brace for a 10% or more fall in house prices, which means more pain and less gain could be on the cards if the RBA raises rates today.
By the way, the cash rate moving from 4.35% to 4.6%, will help mortgage-free, retiree/savers cop higher interest rate returns on their nest eggs, which will help them have more spending opportunities. This is great for them but not for those paying higher interest rates for a home or for running a small business that employs people.
My view is the RBA should wait. I’m not alone, with many of my economic number crunchers in the camp that says that the RBA shouldn’t raise today. Some say they should at least wait to possibly do another later this year if the economy warrants it.
Be clear on this: we’re talking guesswork here. When economists try to guess the economy and what the RBA might decide, it reminds me of when I go to the races and I rely on experts, who know more than me, but they often select a wide range of horses and often get the result wrong!
The AFR’s deputy economics editor, Michael Read, surveyed a number of economists on what should happen to rates and here’s a quick summary:
- Independent economist Justin Fabo says based on history 4.35% is not an inflation-beating cash rate nowadays.
- Barrenjoey’s Jo Masters thinks the RBA will need to raise in November, if it holds today. She thinks there are too many pluses for the economy to beat inflation.
- Judo Bank’s Matthew De Pasquale says consumer spending remains too resilient to forget about rate rises.
- HSBC’s Paul Bloxham says the country’s poor productivity isn’t helping the inflation fight and that’s why the RBA might need another rate hike to lower inflation.
While none of the nice economists pointed the finger at the Albanese Government for making the lives of the mortgage borrowers and the RBA more difficult, let me assure you if they were tested on a polygraph, the machine would make them tell the truth.
And if it’s not their overspending to blame then we should be looking at our leaders’ lack of economic leadership.
This from Jo Masters in the AFR makes the point for me. “Masters said the 4.75 per cent minimum wage pay rise ordered by the Fair Work Commission from July would also quickly flow through to higher prices for services such as eating out, hairdressing, dentistry and veterinary care,” Read revealed.
If you need more proof of gutless leadership, look at Victoria’s new Work From Home legislation that will give Victorian employees a new statutory right to work from home for 2 days a week!
Socially, it’s a great idea but economically, for a country with an inflation and debt problem, it’s economic madness, with a capital M!
Throw in the threats of Iran war and what it might do to oil prices and inflation, and this is looking like the recipe for real economic and market concerns.
We need a smart RBA decision today, which should be a ‘wait and see’ play. If they raise, I will be inclined to think: “I am an economist! Get me out of here!”
