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Here’s why the RBA should ignore all calls for a Cup Day rate rise

Peter Switzer
2 November 2023

With the Reserve Bank Governor Michele Bullock undoubtedly pondering whether she should raise rates on Cup Day, and the pressure building from economists and the media to show some guts and raise to beat down inflation, now the International Monetary Fund (IMF) has joined the pile-in by demanding a rate rise.

I agree our new RB Governor needs to show who’s boss when it comes to interest rates, and as they say in the dressing rooms of champions: “No guts, no glory!” And that’s why the new Guv should stare down the experts and do what the new Federal Reserve did overnight and stay on pause on Cup Day.

In the 1980s when I first started writing for the Daily Telegraph as an economics commentator, I took stories from the IMF and that famous Paris thinktank called the OECD very seriously, thinking them very august bodies. After about a decade, I realised these guys were bad ‘guess’ merchants. They put out forecasts for 2024 but within three months they’ll put out a new one!

As Billy Joel might sing: “Sometimes they’re right. Sometimes they’re wrong. Sometimes they’re crazy wrong!”

This time the economists at the IMF calling for the RBA to raise rates now actually ignore what their training should be telling them. They know interest rate policy works with a lag. No one knows how long that lag is. But we do know that in Australia because of the pandemic, 40% of home loans were fixed. Usually that number is 15%, while those on variable rate loans would number 85%.

This meant that if the RBA raised rates 12 times in just over a year (as it has since May 2022), more Aussies would have felt the pain of higher repayments and the economy would have slowed faster and the jobless rate would have risen quicker as well.

However, because more people are on fixed rates, interest rate policy works slower, so the lag before it takes full effect will be longer.

This week I learnt that there are still a lot of Aussies on fixed rate loans, but when they see their repayments spike when they go onto a variable rate loan, they will cut spending, the economy will slow more, and unemployment will rise.

The CBA head of Australian economics, Gareth Aird, says mortgage payments as a share of income would continue to rise nationally, even without more rate hikes, because a large share of fixed-rate borrowers are still to roll on to higher variable rates into next year. So, this will do the work for Ms Bullock and the RBA. And if she adds more pain to the poor blighters who are already on variable rate loans, then she could push us into recession in 2024.

Meanwhile, this is what NAB’s chief economist, Alan Oster, had to say about a Cup Day rise: “Personally, if I were the RBA, I would not do anything and sit back and wait, because they have time, but given what the governor has said, if she doesn’t follow up with a hike then there’s going to be an issue of credibility.”

So, what has the Governor said? Talking tough in her first speech (as she should given her important job), this is what Ms Bullock came out with: “The board will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation.”

Sure, inflation rose in the September quarter from 0.8% to 1.2% mainly because of petrol prices, while the annual rate has fallen to 5.4%.

The SMH’s Economics Editor Ross Gittins thinks the case for raising rates on Cup Day is weak. He pointed out, after petrol prices “… the next-biggest price increases, for newly built homes (imported building materials), rents (surge in immigration) and electricity (Ukraine war) aren’t caused by anything a rate rise can fix.”

Inflation is up but there is no hard evidence that there is a “material upward revision to the outlook for inflation.” It could fall in the December or March quarter, as more borrowers lose their low fixed-rate home loan.

The RBA said it thought the 2-3% inflation result — which is their goal — would happen around 2025, so the RBA has time on its side to see how the mortgage cliff will help slow spending, raise unemployment and lower inflation.

Our RBA Governor needs the guts to hold until we see more data that proves inflation is falling or rising. Ross Gittins argues the RBA is putting pressure on the people less responsible for inflation to solve the problem, which is inequitable. This is how he put it: “So, when nervous-nelly governors decide to err on the safe side, they’re deciding to beat young home buyers even further into the ground — either sell your house or starve your kids.”

To be fair, the IMF did give one good piece of advice and that was telling the nation’s governments to cut or delay some of their $150 billion worth of promised roads, railways and tunnels or else warning the nation’s home buyers would otherwise face even bigger mortgage pain.

It would be truly great if Michele Bullock showed enough guts to stick it to the nations’ Treasurers from Canberra to the state capitals to cut spending and help bring inflation down. Go guv!

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