Why Australians are set to face years of higher interest rates

Australians could face years of higher interest rates as a result of more global supply chain shocks.

The ANZ bank predicts another large interest rate hike of 0.5 percentage points next month, with unemployment remaining at historically low levels.

Treasurer Jim Chalmers announced a review of the Reserve Bank in July and an issuance document released Thursday suggested it will have a tough job keeping inflation within the two to three percent target.

The Reserve Bank’s communications strategy is also under review after Governor Philip Lowe repeatedly pledged last year to keep the cash interest rate at a record low of 0.1 percent until 2024.

“A central bank faces a tradeoff between meeting its inflation rate and full employment targets,” the review said.

Supply disruptions may become more frequent in the future, for example from further pandemic-related impacts, changes in the degree of global economic integration, geopolitical tensions or natural disasters linked to climate change.

“This calls for further reflection on the functioning of monetary policy in response to supply disruptions.”

Appalled at the way the RBA handled rate hikes, Dr. Chalmers’ most comprehensive review in three decades to examine the bank’s monetary policy decisions.

The review noted that the RBA could improve its communication after Dr. Lowe on several occasions this year denied making any promises about interest rates in 2021, arguing that the Russian invasion of Ukraine had pushed inflation up.

“Effective communication about the economic outlook, policy direction and risks can help the RBA achieve its monetary policy objectives,” the review said.

“For example, a central bank that clearly explains how its policy response will help it meet its inflation target can influence the public’s expectations about future inflation, which in turn can support favorable actual inflation results.”

The national unemployment rate rose slightly to 3.5 percent in August, from a 48-year low of 3.4 percent in July, the Australian Bureau of Statistics said on Thursday.

Despite 33,500 jobs being created, this was the first monthly increase since October last year, when Sydney and Melbourne were still in lockdown.

ANZ said the latest low unemployment rate meant the RBA would likely still raise rates by another 0.5 percentage points in October, pushing the cash interest rate to a nine-year high of 2.85 percent (pictured are blank). tissue box shelves at Woolworths in Sydney’s Strathfield)

But the ANZ bank said the latest low unemployment rate meant the RBA was still likely to raise interest rates by another 0.5 percentage points in October, pushing the spot rate to a nine-year high of 2.85 percent. .

Senior economist Catherine Birch said unemployment rose only because the employment rate had risen to 66.6 percent, from 66.4 percent.

“An overall solid labor market report adds to the case for the RBA to raise interest rates by 50 basis points in October,” she said.

ANZ expects spot interest rates to hit a 10-year high of 3.35 percent in December and Ms Birch said surprising shocks to the global supply chain would mean rates will stay at that level for the next two years rather than pick up. lowered.

“We may see more shocks ahead – whether they are potential geopolitical shocks or further climate shocks,” she told the Daily Mail Australia.

“We are still not completely out of the pandemic and there are other unforeseen shocks that could potentially come through.

“We expect the spot rate to remain at 3.35 percent through 2023 and into 2024 and the main reason is that we think it will take some time for demand growth to slow down enough to drive back inflation.”

ANZ also expects the unemployment rate to fall below 3% in 2023 for the first time since the early 1970s.

The RBA review noted that expectations of higher inflation would lead to larger wage increases, using monetary policy as a tool to influence demand.

“The effect could be magnified if households and businesses adjust wages and prices in anticipation of higher inflation,” the report said.

Inflation in the year to June rose 6.1 percent and the RBA expects the consumer price index to hit a 32-year high of 7.75 percent this year.

The RBA has raised interest rates for five consecutive months since May, with increases of 2.25 percentage points marking the strongest rate of increase since 1994. remain at a record low of 0.1 percent until 2024 ‘at the earliest’

The RBA has raised interest rates for five consecutive months since May, with increases of 2.25 percentage points representing the fastest rate of increase since 1994.

This has happened despite the fact that Dr. Lowe promised in 2021 that the spot interest rate would remain at a record low of 0.1 percent until 2024 “at the earliest.”

The cash interest rate is now at its seven-year high of 2.35%.

The review issues suggested pursuing foreign central banks – such as the Bank of England – which have economists who make interest rate decisions.

“Some overseas central banks have a separate monetary policy council, with a more limited composition of mainly monetary policy experts and professional economists,” it said.

The board of the Reserve Bank of Australia, which meets 11 months a year, lets millionaire business managers make decisions that affect home borrowers.

One-time CEO of Coca-Cola Amatil, Alison Watkins, was appointed to the RBA board for a five-year term in December 2020, when she was still earning $2,178,652 a year as the head of the soft drink bottling company.

She is also now director of CSL, which has manufactured the AstraZeneca Covid vaccine in Australia.

Former fellow board member Mark Barnaba, the vice chairman of Fortescue Metals Group, earns a base salary of $1,162,211 – based on an $802,799 conversion in the annual report.

His five-year term ended in August.

The RBA review is led by Carolyn Wilkins, former senior vice-governor of the Bank of Canada, Professor Renée Fry-McKibbin, Australian National University macro economist, and Dr Gordon de Brouwer, former Treasury and Reserve Bank economist of Australia.