Are rate rises a cure worse than the disease?
THIS column is a big fan of statistics. Politicians, television “personalities”, so-called influencers, yes even journalists, they all have opinions. Many have their own agendas to go with them too. But statistics, honestly compiled, never lie. They cut to the heart of a story.
A perfect but very devastating example came from Lifeline this week.
The charity, which focuses on mental health support and suicide prevention, revealed that in January it saw record activity on its website.
The cause was clear – the cost of living crisis. Searches by Lifeline’s helpline counsellors relating to financial issues and homelessness between August 2022 and January 2023 also went up – by a staggering 49 per cent.
Lifeline Australia CEO Colin Seery, who said the organisation was available 24/7 to offer support, were being contacted by many people who had never suffered financial stress before.
“As well as telephone and digital support, Lifeline has 41 centres across Australia. Some of these centres offer face-to-face crisis support and counselling, including financial counselling,” said Mr Seery.
“Many of these centres are reporting a significant increase in demand for financial support, including food distribution. We are seeing this happen right now, all across the country.
“Our centres are reporting an increase in help seekers who have never experienced financial stress before. And we know cost of living pressures also disproportionately impact the most vulnerable, including people who are unemployed, renters and young families.”
The source of a lot of the problems is, of course, the fact that the prices of almost all goods are rising far faster than wages or benefits.
Worst of all on the Gold Coast is surely the rising cost of rent, which has crippled many families on modest incomes.
The impact of rising costs and squeezed consumer incomes is also being felt very strongly by small businesses in this city, many of which are just getting by.
The Reserve Bank of Australia’s (RBA) answer to all this has been the traditional blunt tool of higher interest rates, which it hopes will force prices down. They nudged them up a little further yesterday, from 3.35 to 3.6 per cent. It’s an imperfect strategy. Higher interest rates may help, at a local level, to lessen demand for scarce materials and labour, thus dampening runaway prices.
But much of the problem is global in nature.
And it’s hard to see how higher interest rates can contribute to greater rental stock, for example. In fact, quite the opposite might be the case, with lending for the construction of new homes in January recording its weakest month in almost 15 years.
“The higher cash rate is compounding the adverse impact of the rising cost of materials, labour and land as well as the increased costs of compliance with the building code,” Housing Industry Association (HIA) Senior Economist Tom Devitt said.
“By continuing to raise rates the RBA risks a longer and deeper slowdown in economic growth than is necessary.”
Extraordinarily, a Consumer Sentiment Tracker from financial comparison site Finder found almost half of renters (43 per cent) said they struggled to pay their rent in February.
Dr Mala Raghavan from the University of Tasmania said the problem could continue to get worse.
“With fewer Australians buying homes, coupled with the inflow of international students and foreign workers, the demand for rental properties will increase, putting significant pressure on landlords to increase rental prices,” Dr Raghavan said.
The fear must be that with yet more interest rate increases the cure could end up being worse than the disease.
Yes, Australia has been addicted to low interest rates and easy loans for a very long time. The party had to end eventually.
But going cold turkey seems a risky strategy.
The economic data taken into account when the RBA decides on its cash rate is unlikely to include calls to Lifeline from people in financial distress.
But maybe they should – for this could be the indicator that tells the real story of what’s going on in our economy.