I'm Nicole Johnston and you're listening to seven AM. It's been a brutal week for Australians. Petrol prices and going through the roof, and now the Reserve Bank has hyped interest rates for the second time this year. Mortgages and rents are about to become even more expensive. It was a lineball decision from the RBA. Five members voted for a quarter of a percentage jump while four voted against it. So the official cash raid is now four point one percent.
But is the increase necessary today? Chief economist at the Australia Institute, Greg Jericho on why he thinks the RBA has got it wrong. It's Wednesday, March eighteen. Greg. What did you think of the RBA Governor Michelle Bullock's reasoning increasing the interest rates yet again?
I think it was pretty poor.
Actually, higher petrol prices will add to inflation, but they're not the reason for today's decision. Inflation was already too high, reflecting the fact that demand is outstripping supply. Higher fuel costs will not slow demand enough on their own to address this.
I think it really demonstrated a disconnect with what's going on in the economy. Not just in Australia but the rest of the world. This real sense that inflation is somehow running hot, whereas what we're seeing is, yes, it's higher than we'd like, but it's certainly not accelerating, not going up. You know, they showed that actually in the end of last year, consumption, household consumption spending was a bit below what that expect. That didn't suggest that we're
out there all spending madly. Unit labor costs, which is sort of the cost of labor was act down in real terms, so it's not rising fast than inflation. So that suggests that businesses aren't really struggling to get workers, so they're having to raise wages and everything to trying to track them. Wage growth itself is steady, inflation itself
is steady. All they were able to really point to was, oh, business investment was up, and it's like, well, there was a sort of a big investment in batteries for renewable and data centers, and it's like, really, that's what we're saying has caused excess demand and increasing inflationary pressures in Australia. I thought, come on, So I thought that was pretty
poorly argued. And also her suggestion and the board suggestion that the oil price rises coming out of the war with Iran are raising petrol prices and are going to raise inflation over the coming months, so they needed to get on and do something about it. Now, again, I think was a pretty poor decision, given we know all of those impacts are due to this massive supply shock of the Iran war. There's nothing the Reserve Bank can
do about that. Raising the cash rate of four point one percent isn't going to open up the straight up on OZ and all it did was double the pain for people who are already having to pay more for petrol, which is something you can't really do without. So no, wasn't overly impressed with her reasoning or the decision.
This hit with the fuel prices and this additional rise in mortgage rates is going to be hard for some people. I do understand that, but it'll be much worse if inflation gets built into the fibers and then we will see the cost of everything going up.
So why do you think they went for this tool at the end of the day, Because they clearly think they're doing something to help the economy.
Well, as people often say about the Reserve Bank. When all you've got is a hammer, everything looks like a nail and the only tool they really have interest rates. And so if inflation is higher than they'd like, they think they must raise interest rates. You know, it seemed like the RBA was just determined to raise rates, that they really want to show that, oh, we're big and
tough and we're acting against inflation. And to me, it feels a bit like they are very sensitive to the criticism from some that back in twenty twenty two they didn't raise rates fast enough, that they shouldn't have waited till May of twenty twenty two when they did raise rates, and so that they're kind of reacting to that, Whereas I think most economists, really, if you were to sort of hold a gun to their head, would say, yeah, it feels like there's a few things happening that are
creating a lot of uncertainty At the moment. We don't know what petrol prices are going to do. We don't know the impact that's going to have on house sold spending, the economy over the next few weeks. It seems like this war is going to keep going on. Why don't we wait six weeks and see what the situation is in May.
This is obviously not the decision that lots of Australians were hoping for. It's not a surprising decision, but that doesn't make it any easier for millions of Australians.
With a mortgage.
So, Greg, how is all of this really going to hit people, especially especially given that people were finally getting a break from these interest rate rises after two years of solid increases that we had after COVID.
Yeah, I mean, this is the thing that the Reserve Bank is really pointing to the end of last year saying, oh things were you know, looking up or that's where all the sort of excess demand, as they say, was, well that was before they raised rates in February, and that really, I think came as a shock to people. People who, unlike me, don't spend every day looking at
what the Reserve Bank is saying. They would have been thinking, oh, hang on, I thought I thought we would finish with this and then to get another one on top of that is a real kind of smack in the face. And coupled with the increase in petrol prices which has been quite stunning of late, you know, we're really seeing, you know, thirty cents and Leader forty cents and Leader kind of increases, sort of going from a dollar eighty to two twenty and above, and the sense that this
is going to be around for a while. It's this sense of oh great, I've been smashed both ways through nothing that any workers have done. It's not because workers have all been getting great pay rises. It's not because we've we've got these massive big tax cuts, or the government's handed out heaps of money to us somehow and we're all spending it madly. It's just, you know, we were just carrying on and then suddenly the Reserve bankers decide, oh, hang on, we really would like a few more of
you to be unemployed. And really that's what it comes down to. So it really is this worrying thing for me that the Reserve Bank remains utterly wedded to this view that there needs to be higher unemployment. They would love unemployment to be around four and a half percent, if not a little bit higher, just to be safe. They have shown a complete unwillingness to be able to
cope with unemployment around four percent or even lower. It's a pretty sad state of affairs, and especially in a period of such a massive uncertainty, because we've got mad men in the White House, no idea what the heck's going to be happening with Iran, and to be suggesting that we shouldn't have at least waited six weeks to find out, to me, seems a pretty poor judgment on the Reserve Bank's.
Behalf coming up. What's the chance of a recession? Greg? We are seeing these huge increases in oil, gas, fertilizer prices that could start flowing through to the rest of the economy, especially our food prices. So how bad do you think that inflation could get from here?
Well, one of the problems is that actually the costs of things like fertilizer and even fuel costs are fairly overstated by most people, and we see this in the media all the time. The real worry is that we're going to see like we saw in twenty twenty two, where off the back of the Russian invasion of Ukraine, where we saw massive spikes in prices and again of
things like fertilizer. The companies looked around and saw all these talk about inflation and going, well, we can raise prices and everyone will just think, oh, well, that's inflation, you know, and by and large it won't be. It'll be just they've seen an opportunity to raise prices, and that's we already were starting to see some of that at the end of last year. What we were seeing at the end of last year that was causing the bit of the jump in inflation that we saw was
an increase in profit margins. So that's my worry. I don't think we're going to see massive spikes, but certainly this kind of increase in oil prices going to lead to inflation increase. But again it's a case of is that an inflation that the Reserve Bank can do anything about. They can't lower the price of oil, they can't lower the price well priced of gas, even a fertilizer. What we could do, given we're one of the biggest exporters of LNG in the world, is we could be looking
at taxing our gas exports. Who are going to be making an absolute motza because one thing people might have realized over the past couple of weeks is that when they're watching the news or hearing about things, is oh, the share prices taken a hit, you know, the stock market's gone down. Well, I can tell you two companies whose prices on the stock may have not gone down are Santos and Woodside. Why because massive gas exporters, and everyone knows they're going to make a motza out of this.
So you know, if we were taxing gas like we should be, we might actually be seeing stories about how actually this war, the increase in all prices is going to lead to a big increase in tax revenue which the government could use to actually help us out. And instead it's all just going to go to profits for companies, and most of those profits are going overseas.
So Greg given this decision and the statement from the Reserve Bank, do you think that we should all be preparing possibly for even more interest rate increases in the future.
Yeah, Unfortunately, I think another one is more likely than not, whether it comes in May or it comes later. They might decide, given they've done two in a road, that it's time to step back and wait, especially because the next meeting comes the week before the budget, so they might decide let's wait and see what comes out in the budget. But again, all of this just puts pressure on the government now to cut back on spending because
it doesn't want to be seen to fueling inflation. And it's like, well, is inflation being fueled by excess demand or is it being fueled by war in Iran? Is it been fueled by increased profits? And if that's the case, then you know the Reserve Bank needs to look elsewhere to find some blame rather than you and me and everyone else who either has a mortgage or would like
to have a mortgage. And unfortunately, it seems that they really like raising interest rates, they really like looking tough on inflation, regardless of the causes, and so that has me worried that there probably is at least one more, if not two, still to come.
And Greg, finally we heard the RBA governor mentioned the dreaded word recession.
We don't want to see a recession or a large rise in unemployment if we can avoid it. That's part of our dual mandates.
So could the impact of the wall be so serious? Do you think that it leads to a recession in Australia or even globally.
Yeah, she was pretty, in my view, fairly cavalier about that.
We don't want to have a recession, but if it's hard to get inflation down, then you know we're going to have to deal with that.
It's like, we do not need a recession to get inflation blow three percent. My god, inflation's at three point eight percent. That's not out of control. It's a bit higher than their target. Anyone thinking that we need the economy to slow down so that we can win the war on inflation is quite deluded, And I would also suggest, in a very secure and well paying job, I really have no truck with economists who think that higher unemployment is a nice and easy payoff for lower inflation. And
recessions are horrific things. The Reserve Bank should be doing all it can to avoid one not thinking, oh, well, if that's the price we have to get of getting inflation under three percent, then that's the price we have to pay. That's just a terrible mindset, and I really hope it doesn't come to that. But again, that's why I would have held off in raising rates this time and waited six weeks to find out what's going on. How is this impacting the global economy, because to be honest,
no one knows. There's no certainty with Donald Trump, and yet the Reserve Bank is acting like.
There is help, Greg, Thanks for joining us.
No problems, great to chat help.
Also in the news, the a Triple C has put fuel companies on notice, warning them against misleading and anti competitive conduct. The watchdog says it will closely monitor the fuel market for price gouging during the war in the Middle East. Major fuel companies, wholesalers and retailers have been asked to explain recent price hikes, which often moved more quickly than expected after the worldwide increase in oil prices and to possible Category three cyclone is making its way
towards Queensland. Meteorologists a warning it could deliver winds of up to one hundred and fifty five kilometers an hour. It's expected to hit far north Queensland between Lockhart River and Port Douglas on Thursday. There's also a warning for heavy rain and flash flooding. I'm Nicole Johnston. This is seven am. Thanks for listening.