Curing inflation using interest rates?
To cure inflation using monetary policy we have 3 groups of HEAVY LIFTERS (and the rest of us Aussies should be fine). Read on to find out if you are likely to be one of the RBA’s heavy lifters.
Some in the media are now (finally) saying that interest rates are a blunt instrument to cure inflation. Blunt might be an understatement. Let’s see what happens and who is impacted when interest rates rise – and when you get to the bottom, you might get a surprise (ok, read down if you must).
So, the RBA’s mantra says you raise interest rates to bring down inflation. But who will be doing the heavy lifting?
First a few facts: Australia has roughly 20 million adults and 6 million kids. And, of those 20 million adults, 13-14 million work and 2-3 million own a business (mostly small business). And to round it out, there are around 500,00 unemployed (i.e. they work for less than one hour a week – so a 2 hour per week worker is a part-timer 😊)
Roughly, one third of adults own a home with a mortgage (with one third renting and one third owning their home outright) – ABS Data. So, the initial brunt of the increase in rates is felt by the one third mortgage holders whose costs go up immediately there is a rate rise. And, by businesses which have borrowed.
Sticking to the adults for the moment, the two thirds who don’t have a mortgage are not initially impacted by a rate rise (in fact, if savings rates go up (lol), some might even benefit).
So, what the RBA is saying (in effect) is: “Ok Australians, hey I’m talking to you with a mortgage! (and you small business owner!), you need to lead the charge on inflation and take a hit. And, as you start ‘doing without’ you will cut your expenditure which in turn will result in slowing demand for products across the board (those sourced and made locally as well as those imported); and for those local products, your drop in expenditure will shrink production and profits will fall.”
So, who will be our HEAVY LIFTERS to cure inflation using interest rates?
– The mortgage holder – about 6 to 7 million adults – probably whom a lot have to look after a majority of the 6 million kids – so up to 13 million impacted
– The newly unemployed – about another 500,000 if the rate doubles
– The small business owner whose profit is often their wage – about 2 to 3 million who may end taking a hit on their home mortgage AND on their business’ viability and profitability (often their wage)
If this logic is correct, the other 12 to 14 million adults should be able to ride the interest rate wave fairly comfortably. It was ever thus.
* Note, I’m excluding the argument on rents as this has little to do with interest rates and more to do with housing availability and demand.