The Reserve Bank’s decision to lift rates by 0.25 of a percentage point to a nine-year high of 2.6 per cent has continued the pain for Australia’s mortgage holders, who are now paying $1000 more a month than they were six months ago. But it also sent a clear message that the bank is listening to concerns that it was lifting rates too fast in an attempt to control inflation. After four consecutive increases of half a percentage point, the smaller rise will give a small measure of relief to many who are feeling the pinch of the fastest hikes since the mid-1990s.
As economics correspondent Shane Wright writes today, it’s time for the RBA to take the temperature. House prices are falling: since peaking in February, Melbourne’s median house value has fallen by $63,000 to $937,000. The latest UBS quarterly consumer survey shows while the nation’s wealthiest Australians still have positive sentiments about the economy and are expected to keep spending, lower income earners now have an “outright negative” financial outlook.
Treasurer Jim Chalmers has hinted there will be few surprises in a “bread and butter” budget.Credit:Alex Ellinghausen
As for the jobs market, the unemployment rate rose in August for the first time since interest rates began heading north, with an increase of 0.1 of a percentage point to 3.5 per cent. This might be another sign that the economy is starting to slow.
Even so, the Reserve Bank accepts that it has at least a year or two before inflation will head back into its target range of 2 to 3 per cent. As it noted on Tuesday, the economy “is continuing to grow solidly and national income is being boosted by a record level of the terms of trade”. It also points to the labour market, with many companies still having difficulty hiring workers.
The problem for the Reserve Bank is two-fold. First, the impact of rising interest rates will take time to ripple through the economy strongly enough to slow consumer spending. That delay means a great deal of calculated guesswork in trying to assess what the eventual impact will be. Second, the bank has little control over many factors that could further boost inflation. While some inflationary pressures triggered by the Ukraine war have subsided – the price of oil has fallen sharply on the sentiment that the global economy is slowing – there are still concerns about how Russian President Vladimir Putin will react to his troops’ manifest failures on the battlefield and trouble on the home front.
There are factors beyond Europe that will also be weighing heavily on the Reserve. At the top of the list is China. Many credible forecasters are downgrading their expectations of China’s growth rate this year, with the communist state expected, for the first time in decades, to grow at a lower rate than the other economies in East Asia, and to continue to be dragged down by trouble in its property market.
Whether the Reserve is right to take the foot off the pedal slightly will be determined only after we have seen the many economic uncertainties play out in coming months.
The next major economic set piece is Labor’s federal budget, due on October 25. Treasurer Jim Chalmers has hinted that there will be few surprises in a “bread and butter” budget. After new British Prime Liz Truss pushed the markets into meltdown with surprisingly large tax cuts – which did not stack up either economically or politically – Chalmers’ caution can only be a good thing.
If Australia is to have any chance of taking the inflationary heat out of the economy without tipping over into a recession, it will require sober policymaking by both the Reserve Bank and the government. The smaller than expected interest rate rise suggests the Bank is adopting just such a cautious approach.
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