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RBA interest rate rises to rise, hampering inflation and accelerating economy

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Reserve Bank chief Philip Lowe may not know the exact price of the 2010 used Subaru Forester, but the RBA’s decision to raise interest rates for the first time since Subaru hit the road was due to pressure on car prices and the wider economy.

After the RBA intervened in the election campaign for the first time since 2007, Lowe used a press conference this week to explain why the bank is raising the official cash rate from 0.1 percent – where it has been since November 2020 – to 0. 35 percent.

More concern for home buyers and businesses, Lowe too signaled a queue of rising rates it will be necessary to bring inflation to the heels.

The bank raised rates in response to last week’s inflation report prices rose 5.1 percent for the last 12 months. The RBA now believes that inflation could reach 6 percent and remain high for most of the next two years.

Current governments around the world are dealing with a dense movement of high inflation and high interest rates.

In Australia, the situation is even more political. The country’s households rank second in the developed world, real estate prices – and mortgages – are at record highs, and the vast majority of people who have a loan have a variable interest rate.

In a debate this week at the National Press Club, Josh Friedenberg and Jim Chalmers argued over inflation.Credit:Nine

It was a thread of debate this week between Treasurer Josh Friedenberg and the man who wants to get a job, Jim Chalmers, at the National Press Club.

Neither one nor the other had convincing arguments as to how they would reduce inflationary pressures.

Friedenberg said global events, including the war in Ukraine and the pandemic, have been major drivers of inflation.

“We want the economy to normalize, which means we will focus on things that will increase the nation’s productivity and create more jobs; tax benefits, investments in additional roads, investments in water infrastructure, investments in telecommunications infrastructure, ”he said.

Friedenberg said the coalition’s policies – including its $ 120 billion, 10-year infrastructure and improved access to childcare – are aimed at increasing productivity and creating new jobs.

“So I would defend our costs, we have turned off emergency support, and in terms of taxes, our record is very clear,” he said.

Chalmers acknowledged that the next government was facing a serious “fiscal problem,” and said the coalition government had spent, taxed and borrowed more than the previous Labor government.

“Immediately when we are elected, we will check the wastefulness of the budget, the shortcomings in the budget, to try to transfer the budget to a more sustainable basis,” he said.

Chalmers pointed to Labor statements about cutting $ 3 billion from the budget in outsourcing contractors and public service consultants, as well as changes in the way multinational companies are taxed.

Inflation of everyday goods puts pressure on working families.

Inflation of everyday goods puts pressure on working families.Credit:Getty Images

Prime Minister Scott Morrison was quick to argue that rates abroad are rising faster than here, pointing to the United States (up half a percentage point on Thursday), Canada (up 0.75 percentage points since early March). New Zealand (0.75 percentage points since February) and the Bank of England (0.65 percentage points since December).

But it is right now. What he failed to discuss is how the Reserve Bank signaled that rates would rise. Financial markets predict that by September next year the official cash rate may rise by 4 percent.

The cost of living has been one of the key debates throughout the election campaign.

The coalition used its own Budget March 29 facilitating the cost of living through payments of $ 250 to welfare recipients, lowering the fuel excise tax by 22.1 cents per liter for six months and exorbitant low- and middle-income tax credits to be credited to bank accounts after July 1.

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During the preparation of the budget, the Ministry of Finance agreed that this amount of money – about 1 percent of GDP – was the maximum that the government could inject into the economy without causing problems with inflation.

Friedenberg adheres to this assessment.

“The Treasury was asked in the budget assessment whether the announcements we made to reduce the cost of living would have a significant impact on inflation, and they said no,” he said.

Obviously, both the Ministry of Finance and the Reserve Bank erred in their assessments of domestic inflationary pressures.

The Treasury budget forecast projected inflation this year at 4.25 percent and 3 percent in 2022-23. The Reserve Bank in February forecast annual inflation by 2022 at 3.25 percent.

Predictions are often erroneous, but not to such an extent. It’s a bit like Columbus fired at China but found America thousands of miles away.

The official inflation rate also does not include rising house prices more than 20 percent in most of the country over the past 18 months.

Data this week from the Australian Bureau of Statistics showed that these higher prices have turned into much larger mortgages.

The average new loan reached a record high of $ 600,000 in March, an increase of 70 percent since the coalition came to power.

There are already signs that house prices are starting to decline.

There are already signs that house prices are starting to decline.Credit:Peter Ray

It is this increase in the size of our loans that makes raising interest rates particularly problematic for the Reserve Bank (and why both major parties have devoted time to housing policy in recent years).

Raising the rate this week by 0.25 points will add about $ 78 a month to mortgage payments of $ 600,000.

Financial markets expect that at the June meeting of the RBA will raise the money rate to 0.75 percent (assuming a cumulative increase in monthly payments to $ 197).

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By the end of the year, the bank could easily have a cash interest rate of 1.5 percent – a total increase of $ 483 per month.

Philip Lowe said the cash rate is 2.5 percent. This will result in a cumulative increase in mortgage payments of $ 600,000 to $ 1,026.

And some economists believe he will have to go at least 3 percent. At this point, mortgage payments would have been $ 3,597 compared to the $ 2,381 that was before the change in monetary policy this week.

In total, this is more than $ 14,500 a year in additional (after-tax) cash that home buyers will have to find in a relatively short period of time.

This is one of the reasons why some analysts believe that the Reserve Bank will not raise rates too high: our level of indebtedness will act as a shield of fiscal policy. This, of course, falls apart if inflation does not return to the RBA target range.

The last time interest rates were raised by the Reserve Bank, Julia Gillard was prime minister, people demanded an iPhone 4, and there were only six Star Wars movies.

Moody’s Investors Services Vice President Elena Chen says the recent rise in interest rates, which is still ahead, will affect the real estate market.

“Raising interest rates will pose the greatest risk for high-balance mortgages and for those whose repayment amounts are close to the maximum solvency of borrowers,” she says.

“Rising rates will also affect house prices, increasing the risks of arrears and loan defaults, as it becomes harder for borrowers who have financial problems to sell their property at high enough prices to repay their debt.”

Used cars are not included in Australia’s official inflation rate. If they were, inflation would be even higher.

Raising tariffs now on their way should finally rid the used car market.

Cut through the noise of the federal election campaign with news, views and expert analysis from Jacqueline Maley. Sign up for our Australia Votes 2022 newsletter here.

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