Rachael, I struggle to see the real impact of a rate rise to slow inflation when the majority of inflationary spending is most likely coming from people without mortgage stress, are these increases only compounding the cost of living pressure s on those who can least afford it, we end up with lots of first mortgage holders exiting and back more dependent upon govt assistance, makes no sense. Seems very elementary economic theory to me.
- Evo
Hi Evo, thanks for your question. We love hearing from our readers.
LoadingThis goes back to some of the questions asked of my colleague Gareth Hutchens on yesterday's rates blog - I linked it for you, below.
We're in a tricky situation aren't we. The RBA knows it, they've talked for a while about being on 'a narrow path' to reign in inflation.
Hike rates too much and we risk recession, don't hike them enough and inflation stays high. It's a classic goldilocks scenario.
We all spend in the economy, groceries, heating, fuel, dinner out, tickets to the game on the weekend and so on, so I think everyone contributes to inflation, regardless if they have a mortgage or not.
But you have a point, rising costs will hurt those with lower incomes than people with more cash to spend.
But let's say our 'well-off' person, let's call them Sally, owns a house that Jack, Oliver and Kate rent.
Sally's just had the interest rate on her mortgage increased for the ninth time since May. Sally's wage hasn't increased so she's spending much more of her cash on her loan repayments.
To recoup some of that increase, she raises the rent she charges.
So now Jack, Oliver and Kate's costs have increased because they're each paying an extra $50 a week on rent (not to mention the extra cash on groceries and power bills).
So while they don't own a home, the increase to the RBA's cash rate is affecting them too.
The RBA wants to inflict this pain on us all, so we stop spending so much in the economy.
If we spend less - that'll mean less demand and prices will naturally come down (as businesses try to encourage us to spend by offering things for cheaper!).
And you raise another valid point - forced sales. There's an expectation people who can't afford their repayments will have to sell their properties in distress (though there's some evidence to suggest it isn't that bad, yet - I wrote about it in yesterday's blog).
There are potentially other, more targeted ways to contain inflation, such as tax increases, which take money out of the economy, just like rate rises do.
One potential example would be the travel and accommodation spending by self-funded retirees, which is contributing to extremely high inflation in that sector.
A rate rise actually gives many in this group a boost to their income, via higher deposit rates.
One alternative would be to increase/introduce taxes on superannuation earnings in retirement, which would take some money out of the budgets of this group.
Thanks for your question Evo.