RBA Hikes Rates a Fifth Time While Households Pay Up

At 4.85 per cent, Australia's official interest rate sits at its highest in 18 years, after four rises this year and a fifth. The people paying for it are home buyers, whose loans are now about two or three times bigger than they were in 2008. Ross Gittins, the Herald's economics editor, says he can't see the "excess demand" that Reserve Bank governor Michele Bullock cited to justify the latest hike.

Who Gets Squeezed

Gittins puts the cost plainly: 4.85 per cent will hurt more than it did in 2008 because house prices, and thus home loans, are now about two or three times higher. Consumer spending makes up well over half of total demand, he wrote, and it isn't growing strongly. People are complaining about the cost of living. Retailers describe price-conscious shoppers.

The only part of the economy growing strongly, according to Gittins, is business investment in plant and equipment, particularly construction of data centres. "Really? Home buyers are being squeezed unmercifully to stop the boom in data centres?" he wrote. He added that data centres raise questions because of their immense demand for power and water, but that's for other parts of government to deal with.

Headline inflation is 4.3 per cent over the year to September. The underlying rate is 3.6 per cent. Much of the rise in the cost of living, Gittins wrote, comes from the high world price of petrol. He wonders whether further tightening will tip Australia into recession.

How the Decision Got Made

Gittins described a process that looks less like deliberation than choreography. The Reserve worries about its credibility and fears a rise in "inflation expectations," he wrote. Bank heavies gave speeches hinting at more rises. By the time the monetary policy board met, markets were almost certain rates would go up a fifth time. Gittins wrote that he wondered whether this behaviour was meant to ensure the board agreed, and that in the end "only a third of them dissented."

The government's target is for consumer prices to rise by no more than 2 to 3 per cent a year. Inflation has been above that since before the Albanese government was elected in 2022. Gittins wrote that since the 1980s, rich economies have left inflation control to independent central banks, which raise interest rates until satisfied prices will rise at a slower rate. The process takes a year or two to have its full effect, he wrote, but works.

Then comes the line that says plenty about elected power. "Anthony Albanese has pledged to avoid a recession. Breaking news: he doesn't get a say in the matter," Gittins wrote. His column, headlined "The midterm message to Trump and Albanese: Fix the economy to keep your job," says voters in the US and Australia are sending the same message about the cost of living. Gittins also wrote there's little government can do directly to reduce prices.

Jobs as the Price of Disinflation

An ABC analysis examined what the RBA calls its full-employment mandate. Clause 8 of the Commonwealth Bank Act 1945, written 81 years ago, set a dual mandate of price stability and "the maintenance of full employment." The ABC analysis said full employment once meant an unemployment rate of roughly 2 per cent. Today it refers to the level at which demand and supply are in equilibrium, which could mean an unemployment rate around 5, 6, 7 per cent or higher. Australian policymakers waved goodbye to full employment in the mid-1970s and adopted inflation-targeting in the early 1990s, the analysis said.

The unemployment rate is currently 4.7 per cent. The bank forecasts it will need to rise to 5.1 per cent by December 2028 to secure the necessary disinflation.

An audience member at the Sir Leslie Melville Lecture put the question the bank would rather not hear: "Trust needs something people can check you against. With inflation, that's the [RBA's] target band. [But] with full employment, there isn't an observable one. And when your estimate of [full employment] changes ... that can look like [you're] moving the goalposts. So how can people hold you to account on that side of your mandate other than waiting to see what inflation does?"

RBA deputy governor Andrew Hauser, who delivered the lecture, said the bank draws together a range of measures of what it "feels like" at full employment. A majority of labour market indicators appear close to, or slightly tighter than, estimated trend levels, he said. The RBA has acknowledged more people are losing faith in its ability to control inflation over the next 12 months.

Hauser had a frank line about who bears which pain. "Inflation is experienced by everyone, and unemployment, sadly, is only experienced by those who are unemployed or ... in some cases, indirectly attached to it," he said. The bank, he added, decided in 2022 and 2023 to raise rates by a little less than some other countries, knowing inflation would take longer to come down, to preserve post-COVID employment gains. "That mission remains fundamentally unchanged. It shapes everything we do," Hauser said of the mandate.

For the household facing a loan two or three times the size it was in 2008, that mission arrives as a bigger repayment. Someone else decided how much unemployment is acceptable, and that someone isn't on the receiving end.