Mortgage rates are coming down again, but is it too late?
At its last meeting, the Reserve Bank board shocked just about everyone and left interest rates on hold. But has it left it too late?
At its last meeting, the Reserve Bank board shocked just about everyone – except itself – and left interest rates on hold.
When the board next meets on August 11-12, it will belatedly cut the cash rate, providing welcome relief for mortgage-holders, businesses and consumers.
But has it left it too late?
Shoppers are closing their purses and wallets. Following a sustained period of high interest rates that the RBA itself concedes are “restrictive”, figures released on Friday confirm that real retail sales per person for the June quarter of this year fell by 0.1 per cent. This follows a contraction of 0.4 per cent per person in the March quarter.
The Reserve’s twin mandate is to keep inflation in the band of 2-3 per cent a year and to achieve full employment.
Following Covid-related supply-chain problems, the inflation rate leapt to 7.8 per cent towards the end of 2022. It has been falling ever since – the latest reading on Wednesday being 2.1 per cent a year for the June quarter, almost at the bottom of the Reserve Bank’s target range.
You might like
Even the Reserve’s preferred inflation measure, the trimmed mean inflation rate, which takes out the fastest and slowest-growing items, is also in the target range, at 2.7 per cent.
In addition to the annual inflation figures for the June quarter, the Australian Bureau of Statistics released the annual rate for the month of June, the final month of the quarter. This gives a better indication of where inflation is heading, since it is for the most recent month available.
The monthly inflation rate for June was 1.9 per cent and the trimmed mean rate was 2.1 per cent – both at the bottom of the RBA’s 2-3 per cent target range.
These numbers tell a story of an inflation rate falling to the bottom of the central bank’s target range. How low does the Reserve want it to go?
In November last year, Reserve Bank governor Michele Bullock argued the economy was running “too hot” when the unemployment rate was 3.9 per cent. Now the unemployment rate has climbed to 4.3 per cent.
Clearly the economy is slowing, and workers are needlessly losing their jobs.
Stay informed, daily
In recent times the Reserve Bank cited the results of its business liaison, where it contacts selected businesses and asks them questions, including whether they are under pressure to give their workers wage rises.
Well, what business would say it’s feeling no wage pressures, that everything is hunky dory and that workers don’t want a wage rise?
Controversially, at its last meeting the Reserve Bank board voted six-three against cutting the cash rate. This was despite clear signs of the economy slowing rapidly.
The most recent economic growth figures show the economy growing at a meagre 1.3 per cent a year.
If it weren’t for population growth, it would have contracted. How do we know? For the same period, economic growth per person was -0.4 per cent. It has been in negative territory for almost all of the past two years. And yet the RBA’s view is that the economy is running too hot!
Far from running “too hot”, the economy has slowed to a crawl. That’s why the most recent board decision to keep interest rates on hold was so puzzling.
The RBA and Treasury have long accepted that if an economy slows down a lot, it is hard to get it going again. Yet the central bank does not seem to regard holding interest rates high for too long as a risk to the economy slowing down even further.
Inflation is now at the bottom of its mandated target range. Consumer confidence is flat following the board’s shock decision at its last meeting to keep interest rates on hold.
Instead of hand-wringing about the possibility of inflation rising again, the Reserve Bank board should be worrying about crushing the life out of the economy, needlessly throwing more workers out of their jobs and bankrupting small businesses.
Dr Craig Emerson is managing director of Emerson Economics and Executive Director of the APEC Study Centre at RMIT University. He is an adjunct professor at Victoria University’s Centre of Policy Studies. He is a former trade minister and economic adviser to prime minister Bob Hawke
