We used to have rate hikes. But that was a decade ago.
For 10 long years Australia has seen the Reserve Bank (RBA) move in one direction only. Rates reached a peak of 4.75% in November 2010, and stayed there for a year before the first cut in November 2011. We’ve been cutting now for nine years — and rates are not expected to rise for another three years at least.
Back in November 2010, the RBA was facing inflation of about 3% — rate hikes were arguably justified. Now, macroeconomists can’t find inflation anywhere. They would love for a bit of wage inflation and a bit of price inflation. But all around the world, it’s out of reach.
The tools of monetary policy are seemingly broken — and the example of Japan, where inflation went missing and a “lost decade” turned into a lost generation, seems increasingly relevant.
In the economic journals, academic macroeconomists are developing theories for why. It seems highly likely the way out of this slump in wages growth, inflation and official rates will not be the same way we got in. We won’t just achieve inflation by low interest rates — a whole new approach to monetary policy might be needed.
The RBA has pencilled in a major review of monetary policy for after the pandemic. Watch this space.
The reason why interest rate cuts don’t stimulate inflation is that a) our economy rests on consumer consumption and b) the consumers i.e. the workers, have poor wages and no job security. It doesn’t matter how low the interest rates are if your pay is too low and you can’t be sure if you’ll have a job in the near future, you keep the purse shut. This situation exists because of the neo-liberal ideology that has driven what passes for public policy over the past couple of decades. And it won’t change until the pain affects the people who make the decisions- which is unlikely when a) corporate executive pay is at multi million dollar levels and b) voters don’t vote against neo-liberalism with enough consistency to make government feel more accountable to the people than they do to big business and political mates.
Capitalism destroying economies.
Raz covers it. 40 years of wage suppression and union bashing has led us exactly where they wanted everyone – up to their eyeballs in debt, low wages and a precarious employment scenario.
The Business Council’s constant calls for more flexibility and less red tape are all about squeezing more blood out of that stone. Of course business wants to be able to pay you minimum wage, not employ you for set hours, not pay overtime rates, not pay penalty rates, retain the right to sack you on the spot without cause, not pay redundancies etc. How else are they going to afford to pay exorbitant executive wages and bonuses?
It’s not a zero sum game. We have gone well past the point where keeping wages low is a benefit to the economy. The share of returns to capital versus labour has been going up for all that time and is now at historical highs for capital in Australia, and still they want more. Business will always want more, more flexibility, more profits, more money kept for itself (lower taxes), more write-offs, more freedom (damn that red and green tape), more ability to socialise the losses while capitalising the profits, more trust fund forts, more Cayman Islands bank accounts.
Great to hear the macroeconomists are working hard to work out why this is all happening. They’re the ones who sent us down this dark alley. There is still no definitive understanding of why inflation exists, it’s all just theory, largely supply-side, but just theory. The economy is far too complex for boffins to model, and the shouldn’t try.
I agree, Jason, that the way out is not via the way we got in. We either need the equivalent of a new Harvester wage case, or perhaps a Universal Basic Income, paid for at least partially by increased taxes on business and the super wealthy, or maybe just getting big business to pay some tax. But in this febrile environment, the last thing that the people with all the wealth want to do is share it. Aux armes citoyens!