Latest / The Morning Edition / Another interest rate hike? Experts say there are other ways to curb inflation

Transcript

Another interest rate hike? Experts say there are other ways to curb inflation · The Morning Edition

0:04
S1: Repeated interest rate hikes are stressing Australian mortgage holders across
0:08
S1: the country. But are higher rates the only way to
0:12
S1: get inflation down, or are there alternatives to the Reserve
0:15
S1: Bank's go to blunt force measure? I'm Samantha Salinger Morris,
0:21
S1: and you're listening to The Morning Edition from The Age
0:24
S1: and The Sydney Morning Herald. Today, senior economics writer Matt
0:29
S1: Wade on the potential and challenge of four alternatives to
0:33
S1: help keep inflation in check. Newly floated by an Australian
0:37
S1: think tank, it's September the 29th. Welcome, Matt, back to
0:45
S1: the podcast.
0:46
S2: Thank you for having me.
0:47
S1: Okay, so we are recording this on Monday at lunchtime,
0:49
S1: but when this episode airs on Tuesday, Australians, many of
0:53
S1: them will be waiting with trepidation for the reserve Bank
0:56
S1: of Australia to announce another interest rate hike. This has
0:59
S1: been widely tipped by the major banks, by economists. So
1:02
S1: how bad is this interest rate rise expected to be?
1:05
S1: And why would we be getting a fourth hike this year?
1:08
S1: I mean, especially since, as you just reported a few
1:10
S1: days ago, unemployment hit 4.6% in August. And that was
1:14
S1: the worst result since November 2021. So what's happening, Matt?
1:18
S2: Yeah, there's a lot going on, isn't there, Sam? Look,
1:20
S2: I think one of the reasons that interest rates are
1:23
S2: so high in the public debate at the moment, or
1:26
S2: such an obsession, is that we've had this long period
1:30
S2: that's literally gone on for years and years where interest
1:32
S2: rates have been very low. And so now they're kind
1:35
S2: of gradually rising and they've actually about to well, if
1:38
S2: they if the reserve Bank, as expected, increases rates on
1:42
S2: Tuesday by 0.25 of a percentage point, lifting that rate
1:46
S2: to 4.6%, we will actually have the highest rates for
1:50
S2: 15 years. Now they're actually not that high. If you
1:53
S2: look back over the decades in Australia. But the point is,
1:57
S2: we've got used to this pretty low level of rates,
2:00
S2: especially during the Covid crisis, where they basically got down
2:04
S2: to pretty much zero. So it's a big change for households.
2:09
S2: And I think we're seeing the effects of that play
2:12
S2: out in the public discussion.
2:14
S1: Okay. And then amid all of this is a new
2:16
S1: report by the center for Policy Development. This is an
2:18
S1: Australian think tank, and it has proposed four different ideas
2:22
S1: for how the Australian government can keep inflation in check,
2:25
S1: besides the blunt force instrument of the interest rate hike.
2:29
S1: So first off, is this just a coincidence that these
2:31
S1: alternatives are landing now, or is this a reflection of
2:34
S1: perhaps broader frustration across Australia?
2:38
S2: Look, I think it's a really interesting part of the
2:40
S2: interest rate story that as the rates gradually get higher
2:45
S2: and higher, and as I say, at a reaching a
2:47
S2: level that we haven't seen for more than a decade,
2:50
S2: that there's debate coming in the community about, is this
2:54
S2: the best way for us to deal with inflation? Now,
2:58
S2: it's a very traditional way to do it. And, you know,
3:00
S2: economists think a lot about this question, and interest rates
3:04
S2: have become the main tool for controlling inflation in our economy.
3:09
S2: But what the centre for Policy Development has come up
3:12
S2: with is sort of a proposal that says, well, there's
3:15
S2: probably other policy tools around that the government could draw
3:19
S2: on to sort of deal with this problem. They're not
3:22
S2: the first ones to say that. Quite a few economists
3:25
S2: are out there proposing some ideas on this question, but
3:29
S2: it's a really interesting sort of like thought process to
3:33
S2: go through to wonder about is, is the government doing
3:36
S2: enough to deal with this problem?
3:38
S1: Okay. So tell us, tell us about these alternatives to
3:41
S1: an interest rate hike that's been floated by this think tank.
3:44
S1: What are they?
3:44
S2: Well, one of the most interesting ones, and the centre
3:47
S2: is one of the groups to propose it. Other independent
3:49
S2: economists have talked about it as well is to use
3:53
S2: our superannuation contributions as a tool. Now what happens for
3:58
S2: every worker in Australia? Their superannuation Contributions are taken out
4:02
S2: of their salary every pay packet at at the rate
4:07
S2: that's set by the government. At the moment it's 12%,
4:09
S2: that's the the legislated level. So the proposal is that
4:13
S2: imagine if you could use that to control demand across
4:18
S2: the economy, because what interest rates do is that for
4:21
S2: people who borrow money, it basically reduces the amount of
4:24
S2: spending power that they have by making them pay more
4:26
S2: in interest. So the idea is to do the same thing,
4:30
S2: but using superannuation contributions by perhaps notching them up a
4:34
S2: percentage point or two, which would mean you'd have a
4:37
S2: little bit less in your pay packet. The good thing
4:39
S2: is that you would eventually get that money back, because
4:41
S2: you'd be saving it for the future. And the proposal
4:45
S2: here is, could that be a way to have a
4:48
S2: similar effect to interest rates, but share it across the
4:52
S2: whole workforce rather than just people who have a mortgage
4:55
S2: or a, or a business that has a loan.
4:57
S1: Okay. And walk us through the other three.
4:59
S2: Well, the other ones are also, well, there's much more
5:02
S2: straightforward one that's always been at the government's disposal, and
5:07
S2: that is just jack up taxes. Like a very easy
5:10
S2: way to take demand out of the economy is for
5:14
S2: the government to say, okay, everyone's got to pay some
5:16
S2: more tax has the same effect. It takes money out
5:19
S2: of people's budgets or people's pockets, and it means there's
5:23
S2: less demand in the economy. And that in turn will
5:26
S2: mean less spending on goods and services, which in turn
5:30
S2: means less pressure on inflation. But as you can probably see,
5:35
S2: that wouldn't necessarily be very popular. But as Saul Eslake,
5:39
S2: one of our independent economists here in Australia, who I
5:42
S2: was speaking to about this recently, he was making the
5:45
S2: point that up until maybe 15 or 20 or 30
5:48
S2: years ago, this was the way that governments worked back
5:51
S2: in the 1950s. This is how governments would deal with
5:56
S2: an inflation breakout. They would jack up taxes. That was
5:59
S2: a much more common response by governments. But it's kind
6:03
S2: of gone out of fashion and sort of it's the
6:06
S2: trend nowadays for interest rates to be the tool that
6:11
S2: we use to control inflation.
6:12
S1: Okay. So tell us about options three and four.
6:14
S2: Well, the other two options that the center for Policy
6:16
S2: Development come up with are more structural changes to the
6:21
S2: way we prepare for inflation problems. So one idea, for example,
6:27
S2: is to build up a strategic reserve of fuel. That's
6:31
S2: what's happening at the moment. One of the issues really
6:33
S2: driving up inflation is rising petrol prices caused by the
6:37
S2: war in the Middle East, conflict in other parts of
6:39
S2: the world. It happened a couple of years ago with
6:42
S2: the war in Ukraine when it began. We've had this
6:45
S2: repeated series of shocks that have put upward pressure on
6:48
S2: fuel prices. So imagine if we had a big supply
6:51
S2: of fuel sitting in Australia that could be released gradually
6:55
S2: and put downward pressure on prices and therefore take pressure
6:59
S2: off inflation. That's one idea, another option. It could be
7:02
S2: another thing that's driving up food prices at present across
7:06
S2: the whole world is the cost of fertiliser, which of
7:09
S2: course is based on products that are produced in places
7:13
S2: like the Middle East. So when you get this supply
7:16
S2: crunch with the basically the transport of oil, it also
7:20
S2: affects other things like fertiliser prices. So the idea is
7:24
S2: build up a stock of fertiliser, perhaps other commodities that
7:27
S2: you might want to keep a stock of. Now again
7:30
S2: it's a good idea. It's an interesting idea. We do
7:32
S2: have countries with strategic reserves, as they call them, of oil,
7:35
S2: especially the United States and China. But Australia has some.
7:39
S2: But we haven't really gone down that path in a
7:42
S2: big way. So it's not an idea that we haven't
7:45
S2: tried in the past. But I guess what this proposal
7:48
S2: would be is that we go back to into that
7:51
S2: idea much more deeply as a sort of an insurance
7:53
S2: policy against future inflation outbreaks.
7:58
S1: And number four.
7:59
S2: Yeah, number four is basically it's to do with the
8:04
S2: energy transition. As an economist I spoke to about this,
8:07
S2: said to me once, if we all had electrified housing
8:12
S2: heating and we had electrified transport, who cares what happens
8:16
S2: to petrol prices? And so that's the point that if
8:20
S2: we could focus more on perhaps the pushing our energy transition,
8:25
S2: so it was more dependent on our transport systems who
8:28
S2: are more dependent on electricity rather than fossil fuels. We
8:32
S2: could ameliorate, again, the impact of rising oil prices, which
8:37
S2: has a direct impact on inflation.
8:44
S1: After the break.
8:45
S2: The criticism of interest rates, if you like, is it's
8:48
S2: falling disproportionately on mortgage holders, especially households with a big debt.
8:54
S2: And that's probably 1 in 4 households that have a
8:58
S2: high debt, and therefore they're paying a disproportionate price For
9:03
S2: the inflation solution.
9:13
S1: Okay, so tell us, I guess, what mainstream economists perhaps
9:16
S1: say about these alternative options that have been floated by
9:19
S1: this think tank, because at least to the layperson, at
9:21
S1: least to me, I'm thinking, well, that some of them
9:23
S1: just sound really reasonable, don't they? Like, okay, we all
9:25
S1: contribute more from super, okay, we're going to get that
9:28
S1: money back eventually. Higher taxes for all. I imagine that
9:31
S1: might be a little bit more contestable, but the government
9:33
S1: building up reserves of fuel and fertilizer to sort of
9:36
S1: insulate us against future price shocks. Or perhaps the government
9:39
S1: spending more on energy transitions to sort of clean energy
9:42
S1: like these sound really reasonable. So tell us, tell us
9:45
S1: what the actual experts say though.
9:47
S2: Look, the point underlying all this is that the truth
9:50
S2: that when you get some of these economic shocks and
9:53
S2: you need to deal with them, someone has to pay
9:56
S2: the price. They're not like, there's no free lunch here. So.
10:00
S2: But at the moment, the criticism of interest rates, if
10:03
S2: you like, is it's falling disproportionately on mortgage holders, especially
10:08
S2: households with a big debt. And that's probably 1 in
10:12
S2: 4 households that have a high debt, and therefore they're
10:15
S2: paying a disproportionate price for the inflation solution.
10:20
S1: And so so is that a fair criticism? Because that's
10:23
S1: the criticism. Is it fair?
10:24
S2: That's the criticism that some of these ideas are coming from.
10:26
S2: But my point is that there's always going to be
10:28
S2: someone paying the price. And the idea of these suggestions
10:31
S2: really is to even up the cost if you like.
10:35
S2: So that's a great objective. But the point I was
10:38
S2: trying to make is that there's a cost, you know,
10:41
S2: if the government decides tomorrow to hike taxes, it would
10:44
S2: probably have a very big impact on inflation. It would
10:47
S2: kill the problem dead, but we'd all be paying a
10:50
S2: lot more tax. And that would probably have big effects
10:52
S2: in the economy too. So the point is, there's a
10:55
S2: price to pay no matter which method you do. And
10:58
S2: it's the same with superannuation in that if we all
11:00
S2: had to pay another percentage point or two on our
11:03
S2: superannuation contributions at every pay packet. It means we've got
11:07
S2: less to spend. That's the whole point of the policy.
11:10
S2: So you know, there's I guess that's the issue is
11:13
S2: who's going to pay the price. Now the problem with
11:16
S2: any solution is it does come with downsides. So for example,
11:20
S2: the superannuation idea, it would mean that every small business
11:23
S2: in Australia would be forced to be kind of mucking
11:27
S2: around with the level of super that they pay to
11:29
S2: their workers. And that would be another compliance cost on,
11:33
S2: on small business. And that's not it's probably achievable with
11:37
S2: modern technology because a lot of our payments are now automated.
11:41
S2: It's not as though someone's sitting there doing it by hand. However,
11:45
S2: it is something that would need to be monitored. They'd
11:48
S2: have to be compliant. You know, someone watching out to
11:51
S2: make sure all the the companies were doing it and
11:54
S2: that adds cost to business. I would have thought that's
11:57
S2: a challenge. The other thing is too, that to do
12:00
S2: any of these things, especially the short term ones, if
12:03
S2: you like, like the ones on superannuation or tax, they
12:06
S2: would require legislation. And you know as much as me,
12:10
S2: if anyone tries to put tax changes through the Parliament,
12:13
S2: especially if the government doesn't control the Senate, it's hard
12:17
S2: to do. And so all these things would be politically challenging.
12:21
S2: And so I think that's a big challenge for these proposals.
12:24
S2: I think though the the good part of it is
12:27
S2: it's getting us talking about it. You know, the question
12:29
S2: is interest rates. The best way to do this is
12:33
S2: a good debate to have.
12:34
S1: And so does one of these alternatives perhaps have the
12:37
S1: most promise, do you think.
12:38
S2: Ah, that's a good question. Look, I think the superannuation
12:43
S2: one is really worth considering. These ideas at this stage
12:46
S2: are just sort of proposals. It would be really good
12:49
S2: for that to get properly evaluated by our central agencies
12:54
S2: like the Federal Treasury. Good modelling to be done. Really
12:58
S2: gritty analysis of how this might work. And I think
13:02
S2: the other point to make is I don't think anyone's
13:04
S2: proposing these things should replace interest rates. Sadly, higher interest
13:10
S2: rates and lower interest rates, the ups and downs of
13:12
S2: interest rates is going to be always with us. But
13:16
S2: the idea of these policy options, I guess, is to
13:19
S2: try and even the load, you know, maybe ameliorate the problem,
13:25
S2: have ways of dealing with inflation. That's just not relying
13:28
S2: on this one instrument called interest rates, which everyone acknowledges
13:33
S2: is a blunt tool.
13:35
S1: Well, I wanted to ask you about this underpinning idea
13:37
S1: that you've been talking about just now, which is that
13:40
S1: there's a growing feeling of injustice, particularly on behalf of
13:43
S1: mortgage holders, right, that they are bearing the brunt of
13:46
S1: the entire country. Getting inflation down by being hit with
13:49
S1: these interest rate rises. Because you told me before recording,
13:52
S1: we were chatting about this and you said, well, the
13:54
S1: reserve Bank would argue that it's not quite that black
13:57
S1: and white. So tell us what the reserve Bank would
13:58
S1: argue and whether there is merit to their argument.
14:02
S2: Yeah. It's interesting. The reserve Bank governor Michele Bullock has
14:05
S2: been asked several times, even in the last few weeks,
14:09
S2: on this question. You know, the bank is very conscious
14:12
S2: that this is being discussed out in the community, that,
14:15
S2: you know, why is it just these mortgage holders who
14:17
S2: are paying so much more interest, and all those people
14:19
S2: who might be retired and own their own home, they
14:21
S2: don't they're not sharing the burden. That narrative, I think,
14:24
S2: is becoming much more common than it was. I mean,
14:26
S2: I've been reporting on economics now for over 20 years,
14:29
S2: and I don't remember this debate being so hot in
14:33
S2: the community. And I think there's sort of several reasons
14:37
S2: for that. One is, you know, as the economy develops, um,
14:41
S2: we've had this period of very low interest rates. So
14:43
S2: a lot of borrowers are very highly leveraged. So there's
14:46
S2: a small portion, maybe a quarter of the population that
14:49
S2: has really big borrowings. And so they're the ones who
14:52
S2: are very hard hit. And that means that they can't
14:55
S2: rightly say, well, what about everyone else? But the thing
14:59
S2: I guess the bank would say, and economists, not just
15:02
S2: the central bank officials, is that interest rates actually work
15:06
S2: in a much more diverse way than just hitting mortgages
15:10
S2: or those who are hold alone. It actually has a
15:14
S2: big effect on the exchange rate, the level of the
15:16
S2: Australian dollar relative to other currencies. That has a big
15:20
S2: impact on the prices we pay for imports. It also
15:24
S2: changes interest rate changes, shift the incentives that you and
15:28
S2: I have to either spend or save. If interest rates
15:32
S2: are a bit higher, you might decide, oh, I'll put
15:34
S2: my money in the bank rather than buy a new
15:36
S2: fridge this year or whatever. So it affects our decisions
15:40
S2: as consumers to in that balance between, are we going
15:43
S2: to spend the money or are we going to save
15:45
S2: the money? It also, there are other ways, you know,
15:48
S2: where interest rates do get into every little nook and
15:51
S2: cranny of the economy over time. It's also worth remembering
15:55
S2: that it's not just households that borrow, it's also businesses.
15:59
S2: So they're also affected. So the argument that it's just
16:03
S2: the poor old, heavily indebted home borrowers who are bearing
16:07
S2: the whole burden. It's much more complicated than that. That's
16:11
S2: an oversimplification of how interest rates work.
16:13
S1: And just to wrap up, Matt, I mean, is there
16:15
S1: any indication that there is political motivation to consider any
16:20
S1: of these alternatives? You know, probably not as a replacement
16:23
S1: to interest rate hikes as a way of managing inflation.
16:25
S1: But perhaps, you know, in addition to, I mean, what
16:28
S1: government is going to take these on, Matt?
16:31
S2: Look, I think the treasurer, Jim Chalmers, was actually he's
16:35
S2: spoken a bit. He's been asked about this too, just
16:37
S2: like the reserve Bank governor has been. And the stock
16:40
S2: standard answer is we're doing all these things. We're being
16:42
S2: responsible with the budget. You know, we're keeping our spending
16:46
S2: in check, whatever whatever. That's a pretty standard political response.
16:50
S2: But I think as this episode, if you like this
16:53
S2: sort of period of economic turmoil that's being caused by
16:58
S2: these multiple shocks, like the Ukraine war, like the war
17:02
S2: in the Middle East that are putting upward pressure on inflation.
17:05
S2: I think they are perhaps shifting the political debate a bit,
17:09
S2: and I wouldn't be surprised if these ideas do become
17:12
S2: more debated. Now, whether governments decide to do anything about
17:15
S2: it or not is hard to tell. Obviously, governments who
17:19
S2: are going to tell everyone we're going to raise your
17:21
S2: tax rates to rein in inflation is not going to
17:24
S2: be popular. So it's hard to know whether it's going
17:27
S2: to happen or anything on these proposals will happen. But
17:29
S2: I think it's positive that we're discussing it.
17:35
S1: Interesting. Well, thank you so much, Matt, for your time.
17:38
S2: You're welcome.
17:51
S1: In other news today, they are about the size of
17:54
S1: a 50 cent piece, weigh as much as a Tic
17:56
S1: tac and travel up to 1000km using celestial navigation and
18:01
S1: the Earth's own magnetic field. And now, after being listed
18:05
S1: as endangered in 2021, Bogong moths are delighting scientists with
18:10
S1: a sudden spring abundance in New South Wales and Victoria.
18:15
S1: Beijing authorities have imposed a total ban on the possession
18:18
S1: of drones inside the Chinese capital by November 15th, which
18:22
S1: has triggered a venting of frustration among some owners, a
18:26
S1: rare occurrence in the city. And fans from almost three
18:30
S1: quarters of the world's countries have purchased tickets to the
18:32
S1: 2027 Rugby World Cup, which will begin here on October
18:36
S1: 1st next year. You can read more at the age.com.au
18:41
S1: or smh.com.au. Today's episode was produced by Josh towers. Our
18:47
S1: executive producer is Tammy Mills, and our podcasts are overseen
18:51
S1: by Lisa Muxworthy and Tom McKendrick. If you like our show,
18:55
S1: follow the Morning Edition and leave a review for us
18:58
S1: on Apple or Spotify. Thanks for listening.