Cost of living crisis: Alternatives to rising interest rates may be even worse for tackling inflation

Australians frustrated with aggressive interest rate hikes are warned that the alternative is for the government to slash spending or impose more taxes.

Economists are divided on whether the Reserve Bank should continue raising rates to bring inflation back to normal, with some supporting a turn toward fiscal policy.

But others argue that the kind of fiscal policy needed to control inflation would be too unpopular with Australians for the government to consider and would cause pain to millions more than just the third of households who are most affected by the cycle of monetary policy adjustment.

The central bank voted this week to keep the cash rate on hold at 4.1 percent, only the second time it has left the rate on hold since it began its aggressive hike last May.

But a hawkish warning in Gov. Phil Lowe’s statement warned mortgage holders of more hikes in the coming months to bring inflation back to the 2-3 percent target.

Inflation eased month-on-month in May, but the RBA will look closely at June quarterly figures to decide whether to leave rates at 4.1 percent for a bit longer or continue raising them.

Stephen Smith, a partner at Deloitte Access Economics, said he believed monetary policy was a worn-out weapon and suggested it was time to consider other methods of controlling inflation.

‘We must focus on fiscal policy, investment and innovation to raise productivity; competition policy to improve efficiency and erode market power; and fiscal policy to boost prosperity,’ he said.

But Joey Moloney of the Grattan Institute said there was no quick fix or panacea to control inflation, and the alternative to raising interest rates was for governments to cut spending or raise taxes, which would hurt more people make rate hikes.

Dr Lowe himself has routinely referred to the ‘painful pressure’ rate hikes were inflicting on mortgage holders, and Moloney said it was being considered whether only a few Australians, around a third of households, felt the pinch. pain, or all

“The unfortunate reality is that there is no way to bring inflation back down to target without causing some pain, it’s just a matter of who will bear that principal,” Moloney said.

AMP chief economist Shane Oliver said the government was unlikely to introduce “risky” fiscal policy. Image: supplied

“Monetary policy has a few different channels through which it affects the economy, but the one that feels most noticeable to people is obviously mortgage interest rates.”

New data released last week by Roy Morgan revealed that more Australians are at risk of mortgage stress now than at any time in the last 15 years.

An estimated 1.43 million mortgage holders – around 29 percent – were in the ‘at risk’ category in the three months to May.

AMP chief economist Shane Oliver said a shift to more aggressive tax policy would have a broader impact on Australians.

‘If we do switch to fiscal policy, is there a way to do it without doling out any pain to Australian households? There really isn’t, because fiscal policy would mean higher taxes or lower spending, and that … is going to do some harm,’ he said.

“There’s no real way to (lower inflation) without spreading some pain.”

Treasurer Jim Chalmers (pictured) has projected a $19 billion surplus in fiscal year 2022-23

Oliver said it was “difficult to trust” governments to follow the path of fiscal policy, because traditionally they are incentivized to do the opposite of what is needed: spend more and tax less.

“That’s how they get votes,” he said.

“So governments have not been as adept at controlling inflation, but there are other things they could do.

“They could temporarily increase retirement contributions… which takes money away from people and puts it in their retirement savings accounts, can ultimately help reduce spending in the short term, but I don’t see it happening.” is considering and it would take a lot of community discussion to make that happen.

“The government can also do things to affect prices over which it has great influence, such as refraining from raising urban transport fares, acting to reduce electricity prices… there is already an element of that in place. The government gets a lot of tax revenue from basic products, some of which could go to help lower bills.’

He said that while government subsidies for childcare and electricity prices were “on the sidelines,” they were helping to reduce the headline inflation rate, which could ease pressure on wage growth, for example. therefore relaxing the Reserve Bank “a bit”.

As for the government’s projected $19 billion surplus in the 2022-23 fiscal year, Moloney said his “heart goes out to Treasurer Jim Chalmers.”

“He’s just been showered with money, and it’s probably very tempting to spend it because there’s a lot of public clamor for cost-of-living relief, but he knows full well that if you spend all this windfall and you put all that money back in the economy. .. that is transmitted to the demand and that will probably be reflected in inflation, and we are going to have higher inflation for a longer time,’ he said.

‘The longer you have higher inflation, the harder it is to bring it back down, the more entrenched it becomes and that means higher interest rates have to go and then potentially we’ll see a bigger rise in unemployment.

“I think not spending these windfalls is the right way to go.”

Prime Minister Anthony Albanese said on Friday the government has pledged to prioritize easing the cost of living for families during the period of high inflation, without putting further pressure on the economy.

“That’s why we designed, for example, the energy price relief plan… to make sure it really puts downward pressure on inflation, while helping people,” he told ABC Radio.

Oliver said that in the absence of a fiscal policy increase from the government, it made sense for the RBA to “sit back for a while” and let rate hikes play out.

“But we still think rates can go higher… I think they are still inclined to keep raising interest rates a bit more this year, although I think they’ve done enough,” he said.

He said the risk of recession was already 50 percent, and any further rate hikes would further increase the possibility.