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Ross Stitt finds the Aussies in a tough position, with rising pressure to provide more cost-of-living relief, but not wanting to overstimulate the economy and put upward pressure on inflation

Public Policy / opinion
Ross Stitt finds the Aussies in a tough position, with rising pressure to provide more cost-of-living relief, but not wanting to overstimulate the economy and put upward pressure on inflation
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The Reserve Bank of Australia (RBA) has done it again. Another interest rate rise. The ninth in a row, pushing the cash rate to a decade high 3.35%.

That’s a remarkable 325 basis points above where it was just last May.

The increase was in line with market expectations and the new rate is still well below New Zealand’s official cash rate of 4.25%, the UK’s bank rate of 4%, and the US’s federal funds rate of 4.75%.

But none of that is any comfort to floating rate borrowers in Australia facing a steep and unrelenting climb in their outgoings. Many are struggling to understand what’s going on.

And it may not stop any time soon. According to Tuesday’s media release from RBA Governor Philip Lowe, the RBA Board “expects that further increases in interest rates will be needed over the months ahead”. The Board “remains resolute in its determination to return inflation to target and will do what is necessary to achieve that”.

Who’s going to blink first, the RBA or the Australian economy?

The signs are mixed.

Consumer price inflation was 7.8% in the December quarter, the highest in more than 30 years. The monthly CPI indicator for December was 8.4%. It’s too soon to say inflation has peaked but the RBA is forecasting CPI inflation “to decline to 4.75% this year and to around 3% by mid-2025”. 

The labour market continues to be exceptionally tight. There are still chronic staff shortages throughout the economy and new jobs are being created at a rapid rate. According to Treasurer Jim Chalmers, last year witnessed the fastest rate of jobs growth of any new government on record.

In December unemployment remained at 3.5%, the lowest rate in 50 years. The RBA expects the unemployment rate “to increase to 3.75% by the end of this year and 4.5% by mid-2025”.

Wages and salaries are rising but not yet precipitously. The rise in the September quarter was 3.1% on annual basis, although the rate of increase may have accelerated since then. The danger is that expectations of entrenched high inflation will drive demands for higher compensation.     

Unlike much of the developed world, Australia is not expected to go into recession this year. Most forecasts, including those of the RBA, see GDP growth slowing but not below 1.5% through 2023 and 2024. The OECD is predicting 1.9% in 2023 and 1.6% in 2024.  

The problem, if you can call it that, is that there are several emerging factors that could stimulate the Australian economy in 2023 and make the RBA’s task of taming inflation more difficult.

The first is the thawing of relations between Australia and its major trading partner China. Under Australia’s previous Prime Minister Scott Morrison, the Sino-Australian relationship was hostile with adverse consequences for more than $20 billion of Australian exports. Since the change of government last year, there has been a major reset.

Last December Australia’s Foreign Minister met with her Chinese equivalent in Beijing. Just this week, Australia’s Trade Minister received an invitation to Beijing and there is even talk that Prime Minister Anthony Albanese will make a state visit to China before the end of the year. There is an expectation that this diplomatic rapprochement will flow through to more trade. Indeed, after an unofficial ban going back more than two years, China has recently allowed imports of Australian coal again.      

At the same time that relations have picked up between the two countries, China has also reopened its borders and abandoned its zero Covid policy. That augurs well for a range of Australian exports, including in the economically significant tourism and education sectors.     

The second emerging positive for Australia is related to the first, namely the arrival of huge numbers of new immigrants, foreign students, and backpackers. The Labor government has made new arrivals a priority, partly to address the severe labour shortages cramping the economy. Current indications are that increasing the migration cap and boosting resources for processing visa applications have been very successful in attracting foreigners.

The third positive is the boost to the government’s budget position thanks to the strength of Australian exports. Recently, sales of major commodities like wheat and coal have benefited significantly from the war in Ukraine. That has flowed through to government tax receipts.

A key question is whether the Labor government will exercise fiscal restraint in its next budget. It’s coming under increasing pressure to provide more cost-of-living relief, but it can’t afford to overstimulate the economy and put upward pressure on inflation. 

The economic elephant in the room is the ‘mortgage cliff’ – the effect of up to 800,000 mortgages with low short-term fixed interest rates rolling over into much higher floating rates in 2023. This is proportionately a much bigger issue in Australia than in most comparable economies because of the high levels of household debt and the prevalence of floating rate mortgages.     

The mortgage cliff will undoubtedly suppress consumer confidence, domestic consumption, and already weak house prices. The big question is how much.

All in all, it’s a complex picture and few would envy RBA Governor Philip Lowe his task. As he put it in his latest announcement, “the path to achieving a soft landing remains a narrow one”.

For some, it’s already too late for Lowe. Soon after the latest interest rate increase was announced, the Greens Treasury spokesperson called on the Labor government to get rid of Governor Lowe and reverse the increase. 

That’s not going to happen but it’s a reminder to the RBA governor that his decisions are political as well as economic.

The Labor government will be hoping that in crushing inflation, Governor Lowe doesn’t also crush the Australian economy.

He’d do well to remember the infamous line of the US army major in Vietnam explaining the destruction of the village of Ben Tre – “We had to destroy the village to save it”.  

That’s not the legacy Governor Lowe is hoping for.

*Ross Stitt is a freelance writer with a PhD in political science. He is a New Zealander based in Sydney. His articles are part of our 'Understanding Australia' series.

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So they have increasing demand (immigration), a tight job market, increasing demand for resources from China, and structurally increasing energy costs... a perfect inflationary storm, really. And to combat this, drastically negative real interest rates.

And they expect inflation to drop several percent within a year?

The level of wishful thinking about inflation continues to blow my mind. Somehow there is a consensus that it will decline by itself for 'reasons'. Maybe because it's a convenient belief for both sides of the politics?


Based on the news readers reaction on the morning show today. I’d say that a significant portion of the country will be completely blindsided by this.


My understanding is that central banks in Aus/NZ are counting on persistently high domestic inflation to be offset by imported inflation dropping off in the medium term.

For starters, they never admitted high inflation was their doing, blaming it entirely on Covid and Putin. So as Covid-induced global supply pressures ease, we could once again offset the rising cost of food and accommodation with cheaper TVs and clothes.

FYI non-tradables clocked annual rates of 2-3.5% in NZ between 2014 and 2017, yet RBNZ felt the need to cut OCR 7 times during this period.


Weak house prices on an artificially inflated bubble is no bad thing. Crude method or not, we should continue to increase interest rates to halt inflation. Should the over leveraged risk takers face the consequences of their actions for the first time in over ten years...I say absolutely. Inflation burns everyone, and bails out the risk takers.

Fourteen days to the next OCR increase...100bp to send a clear message.


Crude method or not, we should continue to increase interest rates to halt inflation.

I'd agree if the collateral damage to the young and indebted wasn't so enormous ... While the benefits to the older with low debts and/or term deposits wasn't so enriching.

Has the New Zealand Reserve Bank ever published a paper categorically confirming that their use of the OCR does in fact treat all sections of NZ's society equitably and fairly? (Answer: No. They have not.) 


Average Australian household debt to income is 187%. One of the highest in the world. USA is 102%, NZ 174% as comparison. Also currently 60% of Australian mortgages are on variable rates. So those borrowers are impacted with 2-3 month lag for every increase in the cash rate. Those that took advantage of low fixed rates in 2020-21 (variable rate loans were historically around 90%) are transitioning to variable rates when fixed rate expires as the variable rates are lower than fixed currently and borrowers are trying to preserve cashflow.

So for the majority of Australian borrowers it is death by ?? cuts (otherwise known as raises).Whereas for the majority of New Zealanders it will be a single stab wound that may or may not kill you. But you will definitely feel it.


Mortgage and buy is the obvious thing to do. High inflation with no political backbone to stop it, and politically demanded low interest rates. What could possibly go wrong? 

Rational replies please.


Rational replies please

You're assuming a central authority has total command over inflation and that fighting it is just a matter of intestinal fortitude.

But yes governments will often please the majority at the expense of longer term economic security. It's an extension of an individual's desire for immediate gratification they have to pay for long after the lustre of the shiny new thing wears off.


Rising interests rates are inflationary. Loan repayments are a large factor in input cost inflation.  Charts of rising interest rates versus inflation prove this.


Ah yes, Erdoğanomics. Worked well for Turkey…