Interest Rates & Insanity

Warning – my opinions aren’t for everyone…

Whilst I was at the track watching the horses go around on Tuesday, the RBA announced a rate increase of a quarter of a percentage point putting interest rates at 4.35%, the highest they have been in 12 years.

Following the hike, a couple of things happened:-

1.?????? The estimates of the impact of the rate increase in real terms were thrown around (adding $76 on a monthly payment on mortgages over $500K) – given the average Australian mortgage is often quoted as being closer to $600K this estimated monthly increase is on the lower side of the real-world increase.

2.?????? There was a flurry of speculation around whether rates would increase further before Christmas, or whether we are looking at a time in the near future when these rates will instead be cut.

At the AFSA Summit last month, it was great to hear RBA Governor Michele Bullock speak, and she was quite clear in saying that 2-3% inflation is the band that is considered acceptable ?and that the concern is that if it is not brought down to that acceptable level (and relatively quickly) that there was a risk that we would get too used to operating with a higher level of inflation, which would have a detrimental effect.

Given that inflation rates in September 2023 are sitting at around 5.4%, basically double what is deemed acceptable, it is an interesting lens through which to look at the potential future direction of interest rates.

But whilst interest rates are (basically) the only lever the RBA has to try and control inflation, there are a number of things impacting the increase in inflation that need to be considered, including the over half-a-million migrants to Australia over the last 12 months.? So whilst the average spend per head is being squeezed, there are more heads to spread it across leading to an overall growth in inflation.? Further, there are only approximately 30% of the relevant population that are mortgage holders which can delay the impact of interest rate increases to others until rental increases (for example) can be implemented.

So with all that, we have to wonder what it might actually take to bring inflation into line.

We have a capitalist economy and should mean that (rightly or wrongly) for the economy to work there needs to be successes and failures (unpopular opinion, I know) and that it is these ebbs and flows that helps to moderate the economy over time.? However, when there is significant Government intervention in this regard, the levers that we can use (such as interest rates) to try and temper the economy can be less effective.? This goes right back (in my mind) to the $900 we all got in 2009 during the GFC, and then more recently with the stimulus packages throughout the COVID pandemic.? Now don’t get me wrong – I am not just some heartless insolvency practitioner that thrives on business failure… but really I am more of a proponent of the definition of insanity being when you keep doing the same thing and expect a different result.? If we want to be more of a government led economy, we need to understand that, and introduce more initiatives for that to happen.? If we want to continue to live in a market led economy, we need to let the market do its thing (even when it hurts some time).

Right.? That spiraled quickly.? Will go back to watching horses…