RBA threatens more rate rises unless we toe the line.

RBA threatens more rate rises unless we toe the line

By Terry Ryder

You almost get the feeling the Reserve Bank board is angry with us. They've had the good sense to repeatedly raise interest rates to quell inflation and we haven't had the decency to respond in the required manner. So they're threatening to keep pushing up mortgage costs.


The problem is, we can't respond in the required manner. Most of the causes of rising prices for key items are beyond our control. Petrol prices are beyond our control. Higher grocery bills are beyond our control. Growing accommodation costs are beyond our control.


But the bloated boffins on the RBA board evidently think we're to blame. So, according to their convoluted policy statement yesterday, they plan to punish us with more interest rate rises until we fall into line.


Sadly, their prime strategy in lifting rates - to get inflation under control - is a failure. They've been raising rates for six years (11 consecutive rises) and it hasn't made a dint.


Indeed, every time the RBA nudges interest rates, it adds to the problem. It lifts the biggest cost every family faces, accommodation (whether you're renting or paying a mortgage). It also factors into higher food prices and higher petrol prices and higher pretty-much-everything-else prices. And it creates pressure for wage rises, which is counter-productive to the RBA's stated objectives.


The key cost items for typical families have been rising much faster than the overall inflation rate. Food prices, according to data from the Australian Bureau of Statistics, have risen faster than inflation every year for the past two decades. Last year food prices rose 6.2%, while petrol went up 14% and rents on average rose 6.4%.


Meanwhile the Reserve Bank board is obsessing over the inflation rate because it's a little outside its preferred band of 2% to 3%.


And they're determined to press on. Yesterday the board issued a strong statement which identified inflation as the biggest threat to the economy and warned they will keep raising interest rates unless we jolly well stop pushing up inflation by buying things like food and petrol.


HSBC chief economist John Edwards describes the RBA's statement as "a shock and awe approach". He says: "They're threatening a sequence of interest rate rises, they're forecasting low growth and high inflation. It's a dramatic change in the presentation of monetary policy."


One wonders what the board expects people to do. Stop eating? Live in tents? No longer drive their kids to school?


Board members need to spend some time in the real world. But that is unlikely, given the make-up of the board.


The board includes Donald McGauchie, about as right-wing and unsympathetic to the average citizen as you could possibly find in Australia. His CV includes senior positions on the boards of James Hardie (one of the nation's greatest corporate villains), Telstra, National Foods and the National Farmers Federation, his role in industrial warfare in the waterfront industries and his position as a climate change skeptic, despite all the scientific evidence.


The RBA board also has Roger Corbett, recently retired from his multi-million-dollar annual salary at Woolworths; John Akehurst, who's made a career in the global oil and gas sector, including senior positions with Shell, Woodside Petroleum, Alinta and CSL; and Graeme Kraehe, whose CV includes being chairman of BlueScope Steel, BHP Steel, Brambles Industries and National Australia Bank.


They're all people for whom money is no problem and interest rate rises are unlikely to cost them their mansions. This out-of-touch quality is reflected in the comment in yesterday's statement that the average household has rarely been better off.


To date, the most evident outcome when the RBA lifts interest rates is that another batch of families goes to the wall. More people lose their homes because they can't meet their payments any more. Home repossessions are running at record levels, despite the RBA's view that "the household sector appears to be handling its debt-servicing obligations well".


Meanwhile the RBA predicts our economy is heading for hard times. Well yes, every time they raise rates, or threaten to, the share market reacts negatively. Every time they raise rates, the development industry goes further into its shell. Every time they raise rates, more families lose their homes. If they keep doing what they're doing, they'll prove themselves right.

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This article was written by Terry Ryder & is taken from the News page of the Hotspotting website http://www.hotspotting.com.au. We highly recommend this website for people interested in real estate.



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