Surprise! We’ve borrowed too much for unexpected rate hikes

So, why did the Reserve Bank raise rates?

It wasn’t because house prices have started to rise again. The recent review chipped the bank for worrying too much about things like house prices. The RBA hiked partly because inflation keeps spreading into new corners of the economy. That worries the Bank that its fight against inflation may linger for longer.

Loading

Partly they did it because the “wonderful news” in job markets – where unemployment remains close to its lowest in half a century – has them nervous. Why nervous? The RBA has consistently feared that low unemployment would set off faster wage growth, and that means prices would start to chase wages, and then wages would then chase prices. (To be clear, that hasn’t been a problem to date, and it doesn’t look to me like becoming a problem. Still, it is what it is, and the Bank’s nerves on that front are part of the story here.)

And partly the Reserve raised rates because population growth is roaring. No, population wasn’t mentioned in the RBA’s statement made after it raised rates. But in a speech a month ago, the central bank’s governor said the current surge in population was pushing up rent – and rents are an increasing driver of inflation.

Given that was already worrying the RBA a month ago, it will have noticed last week’s announcement by the government that population growth will be even faster than earlier thought. (Population growth ultimately has no impact on inflation. It’s just that its immediate impact does add to prices.)

Loading

You’ll be glad to hear that there may also be some good news among these less-than-happy surprises. The rate rise might have surprised most, but it also is increasingly likely that the RBA is now done and dusted with raising rates.

In part that’s because the fight against inflation is a global one, and the news from the rest of the world suggests that the battle is being won. The cost of the stuff that Australia imports is falling, especially energy costs.

And in part it’s because a growing share of Australia’s inflation is in areas where governments can do more than the Reserve and its interest rates can anyway (such as electricity prices, health and education costs).

True, the RBA is keeping some wriggle room on the interest rate front, saying that what happens next “will depend on how the economy and inflation evolve”.

So, there are no guarantees. But Ross and Rachel got their happy ending, and maybe the next move on interest rate rises will be that there isn’t another move at all. I wouldn’t be surprised if that were the case.

The Opinion newsletter is a weekly wrap of views that will challenge, champion and inform your own. Sign up here.