Australia is often described as the lucky country – but that’s not the case for those with a mortgage. In fact, a quick spin of the globe shows we are the unlucky country for borrowers.
The Reserve Bank of Australia this week refused to cut interest rates – despite the fact millions living overseas are getting much-needed relief. And it’s a damning indictment of Labor’s economic management.
Before we tackle who’s responsible for this war on borrowers, let’s take a look at Canada – a country similar to ours in so many ways some call it ‘cold Australia’. It has slashed its policy rate four times this year.
The oft-repeated argument that Australia’s cash rate of 4.35 per cent was lower than other comparable first-world nations no longer holds: The Bank of Canada’s policy rate of 3.75 per cent is 60 basis points lower than Australia’s equivalent cash rate.
Let’s continue our round-the-world trip: The European Central Bank has trimmed rates three times in 2024. And The Reserve Bank of New Zealand has cut rates twice this year.
The Bank of England and the U.S. Federal Reserve have both cut rates once this year but they are expected to provide even more relief by Christmas.
But in Australia, Reserve Bank Governor Michele Bullock has in fact talked up the prospect of another rate hike – fearing a renewed inflation spike.
‘The reason why we’re not ruling anything in or out is we do think there are still some risks on the upside,’ she said.
Australia is often described as the lucky country – but that’s not the case for those with a mortgage (pictured is Sydney auctioneer Karen Harvey)
Warwick McKibbin, a former Reserve Bank board member, tells me the likelihood of Australian interest rates still going up remains high – even though financial markets aren’t even betting on an increase.
‘One rate rise is a lot more likely than two,’ he adds.
‘We’re going to be starting to raise rates when the economy is softening. There’s a chance they’ll be 25 basis points higher between now and early next year.’
Another 25 basis point increase, as he is predicting, would take the RBA cash rate to a 13-year high of 4.6 per cent and add $100 to monthly repayments on an average, $600,000 mortgage.
That would still be lower than the key interest rates in most other nations that have so far cut rates, except for Canada.
But Prof McKibbin says it’s ‘highly likely’ Australia could even miss out on rate cuts in 2025 – as the rest of the world keeps on easing monetary policy.
‘The rest of the world put their interest rates up sufficiently to bring down the inflation rate, whereas we didn’t,’ he explains.
‘We delayed that and now we’re paying the price of higher, persistent inflation which is more costly to bring down.’
Beyond the headline figures that excite Labor cabinet ministers, Australian inflation is still high by world standards – while productivity is embarrassingly weak.
Prof McKibbin, who now heads the Australian National University’s Centre for Applied Macroeconomic Analysis, says that without sufficient productivity growth, Australia will continue to suffer from high inflation – something the rest of the world has tackled more successfully.
‘We either raise supply or reduce demand – otherwise inflation doesn’t fall,’ he tells me.
‘Canada does have productivity growth, whereas we don’t.’
More than other first-world nations, Australia is particularly reliant on high immigration to provide a bigger pool of labour.
In the year to March, more than 500,000 migrants moved to Australia on a net basis, factoring in departures.
This is more than double level of the late 2000s and triple the level of the late 1990s, based on the permanent and long-term influx.
Ms Bullock, who has a level of independence from the government, did not mince her words on Tuesday when she blamed high population growth for keeping inflation high.
‘What’s keeping aggregate demand – even though it’s not growing very much – what’s keeping the level high is population growth,’ she told reporters half an hour after the Melbourne Cup.
‘Aggregate demand is still above the ability of the economy to supply – even though it’s not growing, it’s still above aggregate supply.’
The RBA chief, who studied at the London School of Economics, specifically used the phrase ‘aggregate demand’ – which refers to demand for both goods and services.
Services inflation is still very high at 4.6 per cent – and it’s a number Labor cabinet ministers don’t want to talk about.
But that is a number the Reserve Bank is particularly worried about.
‘Services inflation remains elevated,’ Ms Bullock said.
Treasurer Jim Chalmers likes to crow about headline inflation falling to a three-year-and-a-half year low of 2.8 per cent.
‘Inflation is back in the band,’ he said last month.
Yes, it’s within the Reserve Bank’s 2 to 3 per cent target, but it’s also based on temporary cost-of-living relief like the $300 electricity rebates.
This was a point Ms Bullock was keen to stress regarding headline inflation – also known as the consumer price index.
‘This was as expected due to declines in fuel and electricity prices in the September quarter but part of this decline reflects temporary cost-of-living relief,’ she said.
The RBA this week refused to cut interest rates – despite the fact millions living overseas are getting much-needed relief. And it’s a damning indictment of Labor’s economic management. (Anthony Albanese is pictured outside his fully paid-off Marrickville home with his partner Jodie Haydon after being elected prime minister on May 22, 2022)
The electricity rebate is also a convenient political fix, considering Anthony Albanese won the last election vowing to slash power bills by $275 by 2025 – and he’s facing the voters again next year.
Once that power bill relief expires, the Reserve Bank has headline inflation – also known as the consumer price index – soaring to 3.7 per cent by the end of 2025.
Labor likes to go on about underlying inflation moderating to 3.5 per cent with Dr Chalmers arguing it demonstrates ‘that broader underlying pressures in our economy are easing considerably as well’.
But this trimmed mean measure of average price increases – stripping out the one-off energy rebates and falling petrol prices – is still much higher than Canada’s equivalent level of 2.4 per cent.
New Australian Bureau of Statistics data released on Wednesday also showed employee living costs soaring by 4.7 per cent in the year to September, in a clear sign those paying rent or a mortgage are suffering the most.
With an election coming up, the Reserve Bank is also worried about government spending adding to inflation.
‘It’s not just the federal government, it’s the state governments as well,’ Ms Bullock said.
‘The fact we’ve had to revise up our public demand forecasts – it’s reflected the fact there has been more announcements and more things going on.’
Warwick McKibbin, a former Reserve Bank board member, says the likelihood of interest rates still going up remains high – even though financial markets aren’t even betting on an increase
Prof McKibbin says a series of bad government policies are keeping inflation at high levels.
‘It’s not just high immigration, it’s also excess demand by state and federal governments – they’re still pumping money into the economy which is not necessarily a problem if you’ve got productivity growth,’ he explains.
‘The problem is we have no productivity growth.
‘You’ve got too much government demand in the economy; you haven’t got enough effective workers in the right sectors.
‘It’s a whole, multi-faceted set of mistakes in policy that’s causing inflation to be higher than the central bank target.’
In a concession to the union movement, Labor’s ‘same job, same pay’ laws – equalising pay between permanent and labour hire workers – is also eroding workplace flexibility and making it hard to direct labour to where it is needed.
This further reduces productivity and keeps inflation high.
State government transport infrastructure projects – like Melbourne’s 26km Suburban Rail Loop – are also using up available construction labour as Australia grapples with a housing shortage (pictured is a Melbourne construction site)
State government transport infrastructure projects – like Melbourne’s 26km Suburban Rail Loop – are also using up available construction labour as Australia grapples with a housing shortage.
‘At the moment, they’re sucking workers out of the rest of the economy so you’re not getting construction for housing,’ Prof McKibbin says.
That was a point Ms Bullock emphasised on Tuesday.
‘If you think of the example of the building industry, at the moment, demand isn’t growing there but there’s still inflationary pressure there because the ability to supply even that level of demand is not there – they can’t get workers,’ she said.
‘That’s a concrete example of where you can see the level of demand is greater than the level of supply and that’s what produces inflationary pressures.’
Donald Horne caused a stir in 1964 when his book ‘The Lucky Country’ suggested Australia was a nation reliant on luck – but not intellectual curiosity.
‘Australia is a run mainly by people who share its luck,’ he said.
‘It lives on other people’s ideas, and, although its ordinary people are adaptable, most of its leaders so lack curiosity about the events that surround them that they are often taken by surprise.’
When it comes to economic policy and political leadership, it’s little wonder Australia remains so unlucky. And it’s not just the home borrowers who are suffering.
