Inflation and Interest On The Rise: Who Is To Blame?

In recent months, the news has been abuzz with discussions on inflation and interest rates. The outbreak of the pandemic in March 2020 caught the global economy off guard, and predictions of a severe recession began to circulate.

However, these concerns proved fleeting as governments swiftly sprang into action, implementing quantitative easing measures to support the economy. In Australia, initiatives like JobSeeker, JobKeeper payments, and tax cuts played a vital role in preserving employment. These provided a lifeline to struggling businesses.

Across the ocean, Treasury Secretary Janet Yellen proclaimed that the current inflation was “transitory” . Which ignited division within financial markets and subjecting her statement to ridicule. Hindsight reveals the undeniable inaccuracy of her assertion.

Shouldn’t we have foreseen the adverse consequences of a substantial increase in monetary supply coupled with persistently low interest rates? Nevertheless, I firmly believe that the government made the right decision by implementing quantitative easing.

This approach proved essential in averting an economic tailspin. Nonetheless, I contend that more thoughtful consideration could have been given to the allocation of funds.

It is no secret that a significant portion of government support ended up in the hands of businesses and individuals who did not truly require it. Corporate profits, savings accounts, and discretionary spending saw considerable inflows.

However, what frustrates me the most about this unfolding scenario is the unwarranted blame on RBA Governor Philip Lowe. He has unfairly been cast as the scapegoat responsible for the rising cost of living experienced by many Australians.

Should we genuinely be pointing fingers at him?

Unveiling The News: Why Trust Remains Elusive

The trustworthiness of news is an enduring dilemma. Many misconceive its purpose as serving the community, delivering only unadulterated truth.

However, understanding the true nature of news requires revisiting fundamental principles. News is a business—a medium whose primary objective is revenue generation.

How is revenue generated? By captivating audiences like us. And how are audiences captivated? By playing on our emotions, evoking responses within us. Noticeably absent are stories of joy, constituting only a fraction of airtime.

The reality is that bad news sells far better than good news. Moreover, the news often presents half-truths without delving into the complete story.

Similar to investing, success lies in understanding what one is investing in. Relying on others’ recommendations rarely leads to favorable outcomes. Borrowing ideas is possible, but conviction cannot be borrowed.

In the case of the media, one may choose to believe what they hear, but assigning blame for any resulting pitfalls should not be solely placed on them.

Back in July 2021, RBA Governor Philip Lowe delivered a speech on interest rates and inflation. Media outlets widely reported that he stated there would be no chance of interest rate rises until 2024.

However, watching his actual speech revealed a different story. So, who should bear responsibility in this scenario?

Interest Rates and Inflation a Tale By The RBA Governer

For those of you who never watched the actual speech by Philip Lowe here is the link (time-stamp 5 minute mark). There was no indication in his speech that there interest rates would remain the same until 2024.

In 2020, nobody could have anticipated the overwhelming strain on Australia’s health system. As the nation faced nationwide lockdowns, the notion of early interest rate hikes seemed improbable.

Recognizing the pandemic’s significant impact on the economy, the RBA board acknowledged the necessity of an extended period of low interest rates and subdued inflation for a robust recovery.

However, in hindsight, the economy rebounded with unexpected swiftness, skillfully evading another major recession.

In July 2021, Philip Lowe remarked, “The situation today is quite different than what we faced in March last year; we are no longer looking over a cliff but instead transitioning from recovery to expansion.” This positive trajectory broadened the range of plausible scenarios for the cash rate.

Lowe believed that if the central scenario unfolded as predicted, the cash rate hike would not materialize until 2024. Nonetheless, he acknowledged the existence of alternative plausible scenarios.

Consequently, the probabilities have shifted, prompting the decision to adjust and align with the evolving yield target—an action that reflects this shift in probability.

In the words of John Maynard Keynes, “When the facts change, I change my mind. What do you do sir?”

Lowe’s statement regarding 2024 interest rates was contingent on the economy retaining its 2020 state. However, any change in conditions will impact the trajectory of interest rate hikes.

Regrettably, many individuals who solely relied on news coverage misunderstood Lowe’s remarks. Those who base financial decisions on others’ statements should introspect deeply.

It is easy to point fingers at a person but, rarely does one reflect on their own decisions.

Navigating the Inflation Conundrum: RBA’s Balancing Act and Government’s Role

Controlling inflation presents a challenging task for the RBA – one I would not envy, given the propensity to place blame on their shoulders. The lever they possess to combat inflation is interest rates, a tool with limited upward and downward movement.

If inflation continues to surge, raising interest rates remains the RBA’s primary recourse. They have no other significant arsenal at their disposal to address this issue. However, the impact of rising interest rates is not evenly distributed among Australians.

Delving into the annual reports of major retail banks reveals crucial insights. Roughly 30% of loans are extended to homeowners, who are most affected by escalating interest rates. Another 30% of loans are directed towards property investors, implying that approximately 30% of Australians are renters. These renters bear the brunt of increased borrowing costs passed on by investors.

An ABC news article sheds light on “Older Australians ‘immune’ to rate rises” due to their property purchases with cash in 2022, highlighting a significant wealth gap that requires attention.

This prompts the question: What other measures can be undertaken? While the RBA has been the focal point of efforts to curb mounting inflation, the government holds greater influence and possesses additional tools to tackle the problem.

Yet, it is plausible to speculate that political considerations, such as preserving re-election prospects, may hinder the government from employing more extensive measures.

Considerations arise depending on one’s politics and ideology, prompting various ideas regarding government intervention:

• Potential options encompass increasing employee income taxes, raising the GST, or boosting the Super Guarantee levy.
• Another avenue involves scaling back infrastructure spending during periods of low necessity, such as the present.
• Restricting population growth by imposing immigration limitations enters the realm of possibility.
• Eliminating investment property benefits like negative gearing may diminish its appeal.

However, it becomes evident that these propositions may ignite discontent among the majority of the population. Irrespective of the approach, the government possesses greater efficacy in targeting demand compared to the RBA.

Before vilifying the RBA, let us remember that alternative measures exist to curb inflation, but all hurt just as much.

Key Takeaways

• The media’s purpose is often misunderstood as serving the community with unadulterated truth. Yet half-truths and incomplete stories prevail, emphasizing the need for individual research and conviction.
• Philip Lowe’s actual speech revealed no indication that interest rates would remain the same until 2024. His statement was conditional on the economy’s state, and changes in conditions can affect rate hikes.
• Various intervention ideas exist, but they may provoke public dissatisfaction. Government measures can target demand more effectively than the RBA. While alternative methods to curb inflation exist, their effectiveness varies.

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