- The Guardian
- Issue #2057
The Reserve Bank of Australia (RBA) is navigating a “narrow path” which Government Philip Lowe says is “likely to be a bumpy one.” Bumpy it will certainly be for many Australian workers, small businesses and farmers with loans or paying rent. Twelve rate rises in 13 months have seen interest rates rise from 0.1 per cent in May 2022 to 4.1 per cent in June 2023. In all interest rates have risen by a factor of 41 in a relatively short space of time! Monthly repayments on an average mortgage of $500,000-$600,000 over 25 years have risen by around $1,200 bringing total repayments to $4000 or more depending on the location.
There is a very real cost of living crisis as households face rising prices – rent, food, power bills, health, as well as mortgage repayments. All of this while real wages have fallen and continue to fall.
Lowe admits that “real incomes have declined” and that “mortgage payments as a share of household disposable income will reach a record high later this year.” He also acknowledges that “Rents are also increasing quickly, putting pressure on some households’ finances.”
In addition, he notes, data from banks suggest that spending is most subdued among households with a mortgage, especially those that borrowed large amounts relative to their incomes over recent years, and households that rent. The retail sector is already feeling the impact with demand for non-essentials falling. If this trend continues, which is the RBA’s intention, then small businesses in particular will go to the wall and jobs will be lost.
The labour market, Lowe says, has been very tight, unemployment at its lowest level in nearly 50 years. “It is clear that total demand in the economy has been pushing up against supply, and that, recently, this has been contributing to the upward pressure on prices.” Where demand outdoes supply, companies increase prices for goods and services well beyond any price rises they face.
“The return of inflation to target requires a more sustainable balance between aggregate demand and supply. The tool that the RBA has to achieve this balance is interest rates.” Translating that into plain English, the RBA is increasing interest rates so that households have less income to spend on goods and services. That in turn will reduce demand. It is doing so during a cost-of-living crisis. When demand is reduced, then unemployment rises.
“The path back to 2 - 3 per cent inflation is likely to involve a couple of years of relatively slow growth in the economy. Even so, as the Board navigates that path it is seeking to preserve as many of the gains in the labour market as is possible.” (Emphasis added) “I want to make it clear, though, that the desire to preserve the gains in the labour market does not mean that the Board will tolerate higher inflation persisting.” In other words, the RBA’s interest rate hikes will increase unemployment and that will continue until the CPI is within the RBA’s arbitrary target of 2-3 per cent, regardless of the impact on unemployment or the economy. This is capitalism’s solution to inflation. Make workers and households carry the burden of reducing interest rates and risk recession to achieve its goals. Never mind the impact on workers and households.
Lowe also trots out the capitalist myth about wage rises causing inflation. Again, no mention of profit-gouging by the large corporations or banks not passing on full interest rate rises to depositors while hiking their rates on loans.
A much simpler method and less painful for the working class and the economy would be for the government to step in with price controls, nationalise electricity and increase public housing supply. The establishment of a national, democratically controlled public bank with a strong social charter would force private banks to compete.
Lowe and his corporate board members must go.
