Global Courant
Reserve Bank Governor Philip Lowe and his board have hiked interest rates again – for the twelfth time in 14 months – as they seek to further damage the economy.
House prices are already rising three consecutive months – in March, April and May – instead of continuing to fall as they have been since the Reserve Bank of Australia (RBA) began raising rates in May 2022, a point where the bank notes in his latest statement.
Employment, which the RBA predicted in November to grow 1.4% this fiscal year instead grows at an annual rate of 2.9%. Australians were working in April more hours than ever before.
These are not signs of a depressed economy, and the bank wants to put further pressure on the economy to ensure that inflation falls to where it wants to be.
From the governor written agreement with the treasurer requires him to provide an inflation rate of 2–3% on average over time.
Some of us are fine, most are not
Parts of the economy are slowing down. The statement refers to a “significant slowdown in household spending” (and Wednesday’s). national accounts are likely to be grim), but the RBA is concerned that the slowdown is uneven.
It says that while some households are “experiencing painful pressure”, others have “substantial buffers of savings”.
Those experiencing the pressure are the 35% households with a mortgage. The 31% who rent are also not doing so well. In contrast, many of the 31% who are outright owners are indeed doing well.
Since the RBA began pushing rates in May 2022, the typical interest rate on a new mortgage has doubled — from 2.7% to 5.4%, adding about $1,000 a month to the cost of paying off a mortgage of $600,000. The final decision adds another $90. And yet house prices are rising again.
Lowe wants to make sure
The RBA has raised the rates to a new ten-year high – and strongly hinted it will push them back up, saying “further tightening” might be needed – not because it doesn’t think the economy isn’t slowing overall, but because it wants to make sure it continues to slow enough to keep inflation on track down.
inflation was 7% in the year to March, and 6.8% in the year to April. The RBA wants to bring it back to its forecast of 6.3% for the year to June and the 3% forecast two years after that, and while it looks like things are on track, it’s not certain yet.
If it has to, it is prepared to push Australia’s unemployment rate from 3.7% to 4.5% by the end of next year, potentially putting another 100,000 people out of work. That’s what it is board minutes to predict.
It’s a decision that many Australians will like, according to Treasurer Jim Chalmers.difficult to copy.” The RBA’s job, in Chalmers’s words, is to “crush inflation without cracking the economy.”
The Australian dollar is not buying as much as it used to. Photo: Australian Federal Police
He could have added that Lowe is running out of time. Unless he gets an extension, his six-year term as RBA governor will expire in September.
That gives him just three more board meetings to ensure inflation returns to the RBA’s target of 2-3% before passing the baton to his successor.
Lowe will receive the official reading on inflation for the year to June on July 27. If it doesn’t fall to the 6.3% the RBA expects, it’s likely to raise rates again in August.
Unburden minimum wage
Something that doesn’t seem to bother Lowe much is the Fair Work Commission’s decision on Friday’s national minimum wage, which was heralded by the union movement as an increase above inflation from 8.6%.
What the union movement didn’t say, but Lowe knows well, is that it’s a raise hardly anyone will get. The only people who get the misleadingly named national minimum wage are those who are not already covered by awards, corporate agreements or individual agreements – just a guess 0.7% of the workforce.
So these people are hard to find the Commission says it is “difficult to identify in practical terms any professions or industries” in which they operate.
What their wage increase will contribute to inflation will be next to nothing. The first part (up 2.7%) changes the compensation wages they are linked to from what the committee now considers an inappropriate classification of “C14”, originally a training wage in the metal industry, to “C13”, which is a non- training wage.
5.75%, but only for some
The second part of the increase applies to everyone on benefits, about 20.5% of the workforce, which probably rises to 25% when you take into account other employees whose wages are tied to benefits. It’s an increase 5.75%much less than inflation, and according to the Commission’s calculations only 0.6 percentage point should be added.
Since a pay rise of zero was not sustainable (even the employers asked for 3.5%), this means that the wage increase that a (low-paid) part of us will receive in July will not hamper the Bank’s efforts to curb inflation much.
The Commission believes that employers can afford it. It says earnings are “generally healthy” in the private sector, whose workers rely the most on awards, with the exception of the lodging, food service and retail sectors, which employ a third of awards-earned workers and have enjoyed “significant increases in profits”. ”
Expectations are what matters
The wages of the rest of us who don’t rely on rewards are largely determined by bargaining power and what we expect, as well as the prices companies charge, and this is where the Reserve Bank is concerned.
It wants to erode bargaining power by making sure it cuts spending and employment, and most importantly, it wants to make sure that high inflation doesn’t become entrenched in “expectations,” a point Lowe cites twice in his eight-paragraph statement.
He says if high inflation becomes entrenched in expectations, it will become “very expensive to cut down the line,” requiring even higher interest rates and even higher unemployment.
Peter Martin is visiting, Crawford School of Public Policy, Australian National University
This article has been republished from The conversation under a Creative Commons license. Read the original article.
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