Why Australians are set to face years of higher interest rates

Australians could face years of higher interest rates because of more global supply chain shocks.

The ANZ bank is predicting another big 0.5 percentage point interest rate rise next month with unemployment remaining at historically low levels. 

Treasurer Jim Chalmers in July announced a review into the Reserve Bank and an issues paper released on Thursday has suggested it will have a tough job keeping inflation within the two to three per cent target.

The Reserve Bank’s communication strategy is also under review after Governor Philip Lowe last year repeatedly promised to keep the cash rate on hold at a record-low of 0.1 per cent until 2024.

‘A central bank faces a trade-off between meeting its inflation and full employment objectives,’ the review said.

‘It is possible that supply disruptions will be more prevalent in the future, for example because of further pandemic-related impacts, changes in the extent of global economic integration, geopolitical tensions or natural disasters related to climate change.

‘This is prompting further consideration of the operation of monetary policy in response to supply disruptions.’

Dismay over the RBA’s handling of interest rates rises saw Dr Chalmers launch the most wide-ranging review in three decades to examine the bank’s monetary policy setting decisions.

The review noted the RBA could improve its communications after Dr Lowe denied on several occasions this year that he made promises in 2021 about interest rates, arguing Russia’s Ukraine invasion had pushed up inflation.

‘Effective communication about the economic outlook, direction of policy and risks can help the RBA achieve its monetary policy objectives,’ the review said.

‘For example, a central bank that explains clearly how its policy response will help it meet its inflation objective can influence the public’s expectations about future inflation, which in turn can support favourable actual inflation outcomes.’

The national unemployment rate in August edged up slightly to 3.5 per cent, up from a 48-year low of 3.4 per cent, the Australian Bureau of Statistics revealed on Thursday.

Despite 33,500 jobs being created, this was the first monthly increase since October last year when Sydney and Melbourne were still in lockdown.

ANZ said the latest low unemployment number meant the RBA was still likely to raise rates by another 0.5 percentage points in October, taking the cash rate to nine-year high of 2.85 per cent (pictured are empty tissue box shelves at Woolworths at Strathfield in Sydney)

But the ANZ bank said the latest low unemployment number meant the RBA was still likely to raise rates by another 0.5 percentage points in October, taking the cash rate to a nine-year high of 2.85 per cent. 

Senior economist Catherine Birch said unemployment only increased because the participation rate had risen to 66.6 per cent, up from 66.4 per cent. 

‘An overall solid labour market report adds to the case for the RBA to hike the cash rate 50 basis points in October,’ she said.

ANZ is expecting the cash rate to hit a 10-year high of 3.35 per cent by December and Ms Birch said surprising global supply chain shocks would mean rates stay at that level, instead of being cut, for the next two years.

‘It is possible that we see more frequent shocks ahead – whether that’s potential geopolitical shocks, whether it’s further climate shocks as well,’ she told Daily Mail Australia.

‘We’re still not completely out of the pandemic and there are other unforeseen shocks that could potentially come through.

‘We’re expecting that the cash rate stays at 3.35 per cent through 2023 and into 2024 and the big reason is we think it will take a while for demand growth to slow enough to bring inflation back down.’ 

ANZ is also expecting unemployment to fall below 3 per cent in 2023 for the first time since the early 1970s. 

The RBA review noted expectations of higher inflation would lead to bigger pay rises, with monetary policy used as a tool to influence demand.

‘The effect can be reinforced if households and businesses adjust wages and prices in anticipation of higher inflation,’ it said.

Inflation in the year to June surged by 6.1 per cent and the RBA  is expecting the consumer price index to this year hit a 32-year high of 7.75 per cent.

The RBA has since May raised interest rates for five straight months, with the 2.25 percentage points worth of increases marking the steepest pace of increase since 1994. This has occurred despite RBA Governor Philip Lowe (pictured this month) in 2021 promising the cash rate would stay on hold at a record-low of 0.1 per cent until 2024 ‘at the earliest’

The RBA has since May raised interest rates for five straight months, with the 2.25 percentage points worth of increases marking the steepest pace of increase since 1994.

This has occurred despite Dr Lowe in 2021 promising the cash rate would stay on hold at a record-low of 0.1 per cent until 2024 ‘at the earliest’. 

The cash rate is now at a seven-year high of 2.35 per cent.

The review issues paper has suggested emulating overseas central banks – such as the Bank of England – that have economists making interest rate decisions.

‘Some overseas central banks have a separate monetary policy board, with a narrower composition of mainly monetary policy experts and professional economists,’ it said.

The Reserve Bank of Australia board, which meets 11 months of the year, has millionaire business executives making decisions that will affect home borrowers.

One-time Coca-Cola Amatil CEO Alison Watkins was appointed to the RBA board in December 2020 for a five-year term when she was still earning $2,178,652 a year as the head of the soft-drink bottling company.

She is now also a director of CSL, which manufactured the AstraZeneca Covid vaccine in Australia.

Former fellow board member Mark Barnaba, the deputy chair of Fortescue Metals Group, earns a base salary of $1,162,211 – based on a conversion from $US802,799 in the annual report.

His five-year term finished in August. 

The RBA review is led by former Bank of Canada senior deputy governor Carolyn Wilkins, Australian National University macroeconomist Professor Renée Fry‑McKibbin and former Treasury and Reserve Bank of Australia economist Dr Gordon de Brouwer.