Albanese risks mortgage rate hike with petrol relief
Updated ,first published
Anthony Albanese has put himself and the nation’s mortgage holders on a collision course with the Reserve Bank.
Monday’s decision to halve fuel duty for three months gave motorists a 26c per liter relief, but those with mortgages will likely pay the price with higher repayments.
Contributing more than $2.5 billion to an economy already feeling inflationary pressures will only result in pain.
Angus Taylor’s announcement of a similar plan last week was bad policy.
This prompted independent economist Saul Eslake to warn that the consumption tax cut would increase the likelihood of a rate hike. This warning also applies to this move by Albanese.
Describing the Prime Minister’s announcement, Eslake said: “The government gives, the RBA may well take away.”
Reducing the price of liquid fuels will only increase demand. Although we hate high gas prices, they act as a price signal.
According to a number of economic studies conducted both at home and abroad, a cut of 26 cents per liter in consumption tax would increase demand by 1 to 3 percent.
Given that supply is driving the current crisis, anything added to demand creates problems.
The decision will cut about half a percentage point from headline inflation over the next three months. However, when the consumption tax returns to normal, inflation will jump by half a percentage point.
We have two final examples of what this looks like. The recent end of electricity subsidies has been a major factor in the rise in inflation that has so worried the Central Bank. For example, electricity inflation in Brisbane reached an incredible level of 1695.3 percent in August and September last year.
In 2022, Scott Morrison and Josh Frydenberg’s six-month consumption tax cut just before that year’s federal election cut headline inflation by half a percentage point. But when excise duty returned to normal and Morrison lost the keys to the Lodge, inflation rose to a 30-year high of 7.8 percent.
So we know what happens when you play with a price. But both sides of politics think we should roll the dice again in hopes of getting a different outcome.
There were alternatives. As Alan Duncan, head of Curtin’s Bankwest Economic Centre, points out, the government could have directed oil aid much more precisely.
“A better approach would be to provide targeted support to more vulnerable households and businesses and manage demand more actively, including introducing controls on purchases and prioritizing fuel for key industries,” he said.
The Central Bank must have kittens. It increased interest rates in its last two meetings in order to reduce inflationary pressures in the economy.
Then Anthony Albanese and Jim Chalmers (with the encouragement of Angus Taylor and Tim Wilson) inject $2.5 billion into the economy. This is money that consumers can spend and contribute to inflationary pressures.
The bank was already facing difficult choices before this decision.
HSBC Australia chief economist Paul Bloxham, himself a former Reserve Bank economist, thinks the economy is likely to contract during the June quarter.
Households will cut spending over the next three months, pouring more money into fuel tanks and fearful of US President Donald Trump’s decision to end or continue the war in Iran.
“Whether it falls again in the September quarter (and therefore there will be a technical recession in Australia) depends largely on how long it takes events in the Middle East to subside and how much oil prices fall, among other factors,” he said.
This is the concern of the Federal Reserve and all other central banks. They may have to choose between inflation or economic growth.
Considering the price pressures the country was facing before the war began, there is a good chance that the Central Bank will continue to fight inflation. This will come at a huge cost to households and businesses.
Every country has been harmed by the actions of the United States, Israel and Iran. No one can predict with certainty when this will end and how far the economic turmoil that emerged more than five weeks ago will spread.
Shane Wright is senior economic correspondent for The Age and The Sydney Morning Herald.Connect with: X or email.
