One of the Reserve Bank’s top bosses says Australians misunderstand how monetary policy works, saying it does a lot more than just punish mortgage holders.
Speaking at the Commonwealth Bank global markets conference, RBA assistant governor Christopher Kent said while households focused on their mortgages, rate rises work in four main ways.
These include exchange rates, impacts how much people save and invest, valuations of assets and the cash flow channel meaning mortgage rates.
“When we get questions about monetary policy working, (that) you’re only doing this to hurt mortgage holders, it is important to talk through all four channels,” he said.
“What we always face, particularly in media briefings, is questions about the cash flow channel because that is the very tangible one that everyone in Australia understands even if they don’t have a mortgage.”
So far this year, the RBA has lifted interest rates four times by a total of 100 basis points in its fight against inflation.
This has taken the cash rate from 3.60 to 4.60 per cent.
Mr Kent said higher rates can actually help motorists.
“You may have heard the argument, why is the RBA responding to higher oil prices, we can do nothing to effect higher prices?,” he said.
“Well actually we can because higher interest rates and a higher Australian dollar than otherwise reduces the oil price costs.
“Australians don’t pay US dollars at the pump, they pay Australian dollars.”
In other words, by lifting the cash rate, the RBA can help support the Australian dollar which in turn helps lower the cost of petrol which is priced in US dollars.
Jobs market surprising the central bank
During the same conference, Mr Kent said the Australian labour market was slowing faster than expected, but warned monthly data was pretty volatile.
“I’d always be a bit cautious about the monthly numbers,” Mr Kent told the conference.
”But even having said that, there are indicators where the labour market has become less tight a bit faster than we might have forecast.”
Last Thursday, the Australian Bureau of Statistics figures show the jobless rate came in at 4.7 per cent in September up from 4.6 in August – with economists split on what it will mean for interest rates.
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Betashares chief economist David Bassanese forecasts the RBA will take Thursday’s figures with a grain of salt, due to the current inflation rate.
The latest ABS data showed headline inflation worsened to 4.0 per cent, largely due to the government’s temporary fuel excise tax cut ending.
Meanwhile the all-important trimmed mean inflation rate – which strips out the top and bottom 15 per cent of items – came in at 3.60.
Both figures were above the central bank’s target of 2 to 3 per cent.
“Overall, therefore, the labour market has not weakened enough to take the pressure off the RBA if inflation proves stubborn,” he said.
BDO chief economist Anders Magnusson said last Thursday’s jobs data weakened the case for a Melbourne Cup day rate rise.
“Higher interest rates and slower economic activity may be easing the competition for workers that contributed to domestic inflation pressures in recent years,” he said.
The RBA monetary policy board will meet for the final time this year on December 7-8.
Tax changes credited with helping take heat out of housing
Mr Kent was also asked about Australia’s housing market and the impact of tax changes on slowing it down.
Treasurer Jim Chalmers’ sweeping changes in the May budget were sold as the “most important and ambitious” reforms in decades with the aim of making the tax system “fairer and stronger for workers, businesses, first home buyers and future generations”.
Under the changes to CGT, the 50 per cent discount has been scrapped and returned to indexation, while negative gearing will now be restricted to new builds.
Current investors will be given a one year grace period before the changes take effect for assets bought after July 1, 2027.
Mr Kent was asked if the blow to the wealth effect – the theory that households spend more when they feel richer and pull back when they feel poorer – is doing the Reserve Bank’s job for it.
“It is moving in the same direction of monetary policy,” he said.
“I think it is hard to split [the tax changes and monetary policy] exactly, but in terms of the effect on investor credit, that is no doubt down to the tax changes.
“So look, I think it is in a helpful direction.”
The comments come as fresh data from REA Group shows national house prices fell for a sixth consecutive month in September, dropping a further 0.2 per cent.
Prices are now down 3.3 per cent from their March peak, although on an annual basis affordability has barely shifted, with prices just 0.1 per cent lower than September last year.