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RBA Governor Michele Bullock only has \u201cone lever\u201d for taming inflation. Picture: Nikki Short<\/p>\n
OPINION<\/p>\n
Today the RBA hiked rates for the fifth time this year, taking the cash rate to an 18 year high.<\/p>\n
The last time it was at this level, we were mired in the midst of the GFC.<\/p>\n
But this latest hike will not be effective in bringing inflation down.<\/p>\n
We are seeing month after month that inflation is a much bigger problem than can be solved by taking more money off people with mortgages.<\/p>\n
And there are a couple of other problems with the way the RBA\u2019s \u201conly lever\u201d (as they keep reminding us) to manipulate inflation works.<\/p>\n
First of all, raising interest rates may mean less money in the budget for mortgage holders, but it also means more money in the budget for people who own their homes outright, because they get higher returns on their cash product investments.<\/p>\n
MORE: The 10 economists predicting an RBA hold<\/a><\/p>\n Mortgage holders make up roughly a third of the adult population of Australia, but so do those who own their homes outright. So one basically offsets the other. And the latter are the ones more likely to be treating themselves to a bit of discretionary spending.<\/p>\n Who would be spending extra money on petrol these days, for example? Could it be the grey nomads travelling the highways in their fleets, flush with extra money from their increasing term deposit returns?<\/p>\n The RBA has lifted the cash rate to 4.85 per cent.<\/p>\n The other problem is that housing accounts for nearly a quarter of the consumer price index weighting (CPI), which the RBA uses as a gauge.<\/p>\n Housing prices aren\u2019t measured in the CPI, but construction costs and rents are included.<\/p>\n When rates go up, landlords are more likely to increase rents to cover their own extra borrowing costs. And with vacancy rates still incredibly tight, they are able to hike rents without risking vacancy periods. Those rent increases turn up in the next CPI and, uh-oh, looks like inflation is on the rise again \u2026 better hike rates!<\/p>\n Surely, the time has come to find a better way to put the brakes on inflation and get it back to where it needs to be.<\/p>\n<\/p>\n