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What a difference a number makes. For weeks, the money market’s macho men had been telling us interest rates needed to rise yet further to ensure inflation would keep falling. But last week, their case went up in smoke and now almost no one thinks the Reserve Bank board will do anything at its two-day meeting starting today.
The weeks of idle speculation came to an end when finally we saw the consumer price index for the June quarter. It showed underlying inflation falling to 3.9 per cent.
There’s little chance the Reserve Bank, led by governor Michele Bullock, will move interest rates this week.Credit: Michael Quelch
So, sighs of relief all round. But why had we allowed these misguided souls to cause us so much angst? Why had their intimations of death and destruction been given so much air time?
Short answer: because we find bad news more interesting than good news. But as last week’s abrupt turnaround reminds us, the bad news ain’t necessarily so. So maybe we should give a hearing to those urging the Reserve to do something nice rather than nasty.
Let me tell you about a briefing note from the economists at the Australian Council of Social Service, who remind the Reserve that its much-remarked “narrow path” to lower inflation without triggering a recession and high unemployment is narrow “because it’s rare for interest rate hikes of this scale and intensity not to trigger a serious economic downturn”.
The peak welfare organisation says the process of reducing demand and lowering inflation is already well under way and, since increases in official interest rates take up to two years to flow through to inflation and unemployment, it has called for the Reserve to start reducing interest rates immediately.
Those who focus on the slowdown in the fall of the inflation rate and conclude there’s a need for further tightening have failed to see how sharply job opportunities and living standards have fallen, even without a recession.
The council examines the data for the two years since the Reserve began increasing interest rates, from June 2022 to June 2024, and it finds a lot more evidence of downturn and pain than you may realise.
For a start, the number of vacancies for entry-level jobs has declined by almost a third. There are an additional 100,000 people unemployed, and almost as many extra people suffering underemployment (unable to find as many hours of work as they want).