Former Reserve Bank economist suggests Greens push for interest rate freeze is nonsensical

Greens senator Nick McKim says homeowners took on massive debt believing rates wouldn’t rise before 2024 and are now getting ‘smashed’

A call by the federal Greens for an interest rate freeze could push consumer prices higher and hurt savers and renters, an expert has warned.

Economist Dr Zac Gross issued the warning after the Greens economic justice spokesman, Nick McKim, called on the Reserve Bank to “hit pause” on cash rate rises until the October budget to pressure the government to “rein in corporate profiteering”.

In May, the RBA began the current round of rate rises that have taken the official cash rate to 1.85% from the emergency levels of 0.1% set in November 2020.

The rate rises are considered necessary to combat soaring inflation which is tipped to reach 7.75% by the end of the year. But they are controversial because the RBA governor, Philip Lowe, had suggested last year that rises were considered unlikely until 2024.

The RBA meets on Tuesday to again consider the cash rate which is tipped to rise a further 40 or 50 basis points.

On Sunday, McKim said that “hundreds of thousands of people were induced into taking on massive debts” on the basis that Lowe had “as good as said” rates would not rise until 2024.

“He can’t then turn around and smash homeowners and renters with rate increases to deal with inflation that they are not causing while their wages are going backwards in real terms,” McKim said in a statement.

“Inflation is being driven by global supply shocks which neither the RBA nor the government can do much about. This is not the 1970s. We have a profit-price spiral, not a wage-price spiral.

“Instead of jawboning down wages, Philip Lowe should be jawboning down corporate profits and heaping pressure on the government to do something about it.”

Gross, a lecturer at Monash University and former Reserve Bank economist, told Guardian Australia “freezing interest rates would inevitably lead to higher rates of inflation [and] higher prices at the supermarket”.

“Homeowners and people with mortgages might benefit, but it would come at a cost to Australians in the form of higher prices across the board.”

Gross noted that higher interest rates benefited those without a mortgage – including seniors who own their own home, renters saving a deposit and aspiring first homebuyers – who would benefit from declining house prices.

He said the RBA was “a bit behind the eight ball” in lifting rates but “regardless of what Jim Chalmers hands down in the October budget update, higher interest rates are an appropriate course of action”.

Gross said businesses also borrow to invest, so lower rates would do nothing to tackle corporate profits.

“Retail spending is at all-time high levels. It’s not just companies being greedy causing higher prices … it’s households flush with cash after not being able to spend for a period of time [in the pandemic] … and they’re now back with a vengeance.

“This ‘profit-price spiral’ idea doesn’t make a whole lot of sense to me. Higher interest rates also punish businesses.”

In August, the federal treasurer, Jim Chalmers, promised a review of the RBA, to report by March, would not “mess” with the central bank’s independence.

Instead, the government would consider “how we weigh up the bank’s full employment objective [and] how we weigh up its inflation targeting regime”, he said.

Chalmers told ABC’s 7.30 the government would not “make things harder for the Reserve Bank” by commenting on how it should make decisions, but would focus on the supply side factors it can control such as labour shortages and costs.

In July, Chalmers said the latest round of rate rises aimed “to take some of the sting out of inflation by managing demand in the economy”.


Paul Karp

The GuardianTramp

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