The major banks are under fire for the interest rate increases while the RBA seems to escape any flack, why? It is simply, we have become used to a scenario where the RBA can increase interest rates to fulfil its obligation to maintain inflation within the 2% to 3% band.
Give Inflation a Chance
The major banks are under fire for the interest rate increases while the RBA seems to escape any flack, why? It is simply, we have become used to a scenario where the RBA can increase interest rates to fulfil its obligation to maintain inflation within the 2% to 3% band. It has this obligation because Government mandated it to do so. I wonder if sometimes the inflation bands should be adjusted in terms of where the economic cycle is just the same way as interest rates are amended. There is no doubt that we don’t want inflation in the teens or out of control but I am sure there is an argument for letting it run within a band of 2% to 6% or there about.
As it currently stands our inflation band control is one of the issues which is indirectly causing our currency to rise and our interest rates to be among the highest in the world. The consequences for the housing sector include:
- A reduction in the building of new homes
- Increased levels of stress among those who have borrowed
- Higher household rentals as more people are forced to rent
If we were to let inflation run a little then wages would rise, making housing more affordable. There would still be a cap on prices as our bankers do not have the same easy access to funds as they did a few years ago. This will keep the volume of home lending within reasonable limits and put a lid on house price rises. Rising inflation means our dollar’s exchange rate falls, and this brings many benefits:
- An increase in international students and subsequent income for our universities
- An increase in overseas tourists
- Greater competitiveness for our rural industries
- More building of new homes and commercial properties
- More local manufacturing industry opportunities and jobs
- Lower stress levels for those who have borrowed for their home
- Lower rents as the number of people who can afford to buy a home grows
- Higher levels of foreign capital investment in Australia
Maybe it’s time to rethink our current inflation targets and the RBA’s obligation to keep raising interest rates, given all the pain that causes homebuyers. Give inflation a chance and let it resume a rate that better reflects our national economic situation, because only wages growth through inflation can make housing more affordable while the housing shortage continues.
By Graeme Pillemer
Residex Research
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December 2010
