Inflation is so stubborn that home borrowers are being told not to expect any relief until next year.
Even if the Reserve Bank does act, the futures market now thinks only one interest rate cut is likely in 2025 with not much more relief to follow in 2026.
But the Greens want to force the RBA to provide relief – which sounds like a good thing at first but in the long term seriously risks Australia’s fight against inflation and would almost certainly come back to haunt the economy like it did decades ago.
While rate rises are obviously unpopular with borrowers, Australia has so far been spared the double-digit inflation horror of the 1970s and early 1980s.
Stagflation – where inflation and unemployment are both high at the same time – is now something to read about in textbooks rather than experience as a living, economic horror.
So is a repeat of double-digit mortgage rates that led to prolonged recessions in the era before the internet.
That’s because both major parties in the early 1990s agreed the Reserve Bank needs to be independent and not make decisions based on politics or what’s popular with voters.
The Labor Party, in a practical sense, gave the RBA independence in 1993 and the Coalition in 1996 formalised its independence to stop politicians from interfering with monetary policy decisions.
Inflation is so stubborn that home borrowers are being told not to expect any relief until next year. (Pictured is a Sydney shopper)
But the Greens are now demanding the government force the Reserve Bank to cut interest rates rather than address a cause of high inflation: too much government spending.
The hard left minor party’s dissenting report – for a Senate inquiry into the cost of living – demanded Treasurer Jim Chalmers override the Reserve Bank and cut interest rates.
Greens senators Penny Allman-Payne and Nick McKim called on the government to use a power that has never been used since the Reserve Bank was legislated in 1959.
‘The Treasurer, Jim Chalmers, has failed to fully utilise the fiscal policy levers at his disposal to address inflation,’ they said in the report released on Friday.
‘As a result, the Treasurer has left the Reserve Bank to use the only tool it has to fight inflation: smashing mortgage holders and renters with record rate hikes.
‘Monetary policy is a blunt tool that punishes those least responsible for inflation the most.
‘This is why the Greens are calling for the Treasurer to use his powers under Section 11 of the Reserve Bank Act to force the Reserve Bank to cut interest rates.’
The Reserve Bank Act of 1959 gives the Treasurer the power to override the RBA but that power has never been used and Dr Chalmers is now adamant it should only be an absolute last resort.
The Greens want to force the RBA to provide relief – risking Australia’s fight against inflation that would come back to haunt the economy like it did decades ago. (Pictured is Greens leader Adam Bandt with his wife Claudia Perkins)
AMP chief economist Shane Oliver says forcing the Reserve Bank to cut rates prematurely, as the Greens are advocating, would see inflation remain high if politicians looking to get re-elected made the decisions.
‘It could run the risk that we don’t get inflation back to target – you cut interest rates prematurely, you’d end up with more pain down the track,’ he tells me.
‘You’d end up with much higher inflation.
‘Politicians have a bias: they want to do things that win them votes so spend more money, get interest rates lower.’
Turkey’s annual inflation rate is a whopping 49.4 per cent in a nation where President Recep Tayyip Erdoğan routinely interferes with monetary policy.
When Australia let politicians control the RBA, government bond yields – or the return an investor requires annually – shot up, leading to more government spending just so the government could keep borrowing more money.
This led to even higher interest rates that led to higher unemployment, climbing above 11 per cent in late 1992.
The Coalition preferred to focus on excessive government spending, after the Reserve Bank blamed state and federal government projects for adding to inflationary pressures.
Liberal and Nationals senators have recommended Prime Minister Anthony Albanese revive the National Cabinet with state premiers and territory chief ministers – that existed during Covid – to work out spending cuts.
The underlying inflation rate of 3.5 per cent is still well above the Reserve Bank’s 2 to 3 per cent target and headline inflation, now at 2.8 per cent, is tipped to surge again next year after the $300 electricity rebates expire.
Greens leader Adam Bandt this month described U.S. President-elect Donald Trump as a ‘dangerous demagogue’
Services inflation in September was even higher at 4.6 per cent, signalling the fight against high consumer prices is still far from over even after 13 interest rate rises that have taken the RBA cash rate to a 12-year high of 4.35 per cent.
Greens leader Adam Bandt this month described U.S. President-elect Donald Trump as a ‘dangerous demagogue’.
Ironically, the ‘demagogue’ he is criticising also hates central bank independence and is planning to sack U.S. Federal Reserve chairman Jerome Powell for not cutting interest rates deeply enough.
It seems Mr Bandt and Mr Trump have a lot in common when it comes to their views on exerting political interference on central bankers.
A history lesson is useful here: ahead of the 1972 presidential election, Republican incumbent Richard Nixon famously told US Fed chief Arthur Burns in 1971 to refrain from raising rates.
‘Just kick ’em in the rump a little,’ he said, with his Oval Office utterances recorded on tape.
Nixon was re-elected in a landslide but resigned less than two years later over the Watergate scandal.
His political interference was bad not just for the world’s biggest economy. Everyone suffered.
The OPEC oil crisis occurred in 1973 and by the mid to late 1970s, Australia and the United States were both suffering from double-digit inflation, because of loose monetary policy before that crisis.
The Greens, with their populist posturing, seem to be channeling the Republican presidents they claim to despise because they don’t understand economics or history and seek to remain ignorant.
‘They don’t really care about the long-term inflationary consequences and the fact that Australians will end up paying for it,’ Dr Oliver says.
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