Soaring inflation puts pre-election interest rate hike on the cards

With inflation soaring to a 21-year high, a pre-election hike in interest rates could now well be on the cards, experts say.

If Australia’s Reserve Bank raises the official cash rate next week, Scott Morrison will become the first prime minister to face an interest rate rise during an election since John Howard in 2007.

Mr Howard went on to lose his own seat of Bennelong and the top job.

However, speaking to reporters, Mr Morrison denied the two situations could be compared.

Combined with export demand and higher fuel costs, food prices have been heading north at a faster rate than inflation.
Combined with export demand and higher fuel costs, food prices have been heading north at a faster rate than inflation. (9News)

“The first point to note is that in 2007 the cash rate was 6.5 percent. Today, it is 0.1 percent,” Mr Morrison said.

“So, I think to draw an equivalence between those two issues would be to misunderstand history. They are very different situations. We are in the middle of a global pandemic, with a war in Europe.

“Those situations were not in place in 2007…I think Australians understand that.”

Inflation growing ‘twice as fast as wages’

Inflation is now at 5.1 per cent, its highest level since since 2001, when the Goods and Services Tax was introduced.

Australia Institute chief economist Richard Dennis told Today inflationary pressures meant the chances of the Reserve Bank making the move at their next meeting was now about 50-50.

“They are going to increase interest rates, they are going to do it. Whether they do it at the next meeting or the meeting straight after the election, you know, it is as much to do with politics, really, as it is to do with economics,” Mr Dennis said.

“One of the Reserve Bank’s main job is to control inflation, to control the cost of living, and what we have just seen is inflation at 5.1 per cent, and that’s twice what wages are growing at.

“So, real wages in Australia now are falling, because prices are going up so much faster than wages.”

Aussies hit in hip pocket at grocery stores

Gary Mortimer from the Australian Business School said Australians had been hit hard at the supermarket check-out with the price of some groceries rising at an even faster pace than the overall inflation rate.

“We have seen the price of fruit and vegetables increase higher than the 5.1 per cent reported as the general inflation rate.

“The other area we have seen is beef prices and lamb prices. They are skyrocketing.

“We had the SPC chairman come out and say continued fruit and veg and baked beans possibly going up 10 to 20 percent.”

Mr Dennis said the government’s stimulus policies during the COVID-19 pandemic and into the election year had led to inflation increasing at a faster than normal pace.

Australia's property market is expected to hit a sharp downturn as interest rates increase.
Australia’s property market is expected to hit a sharp downturn as interest rates increase. (Supplied)

While the extra stimulation to the economy was necessary, some actions, such as paying millions in JobKeeper to retail giant Harvey Norman had failed to have the desired impact, Mr Dennis said.

“What’s happened is we poured a lot of money into the economy during the crisis, that was good, but because of the way the money was spent it hasn’t set us up to come out stronger and better.

“Now, we are seeing inflation rise faster than people expected, and that means the Reserve Bank are going to have to pull on the brake probably harder and faster than they expected.”

When politicians facing the public gets ugly

PM grilled on cost of living

When questioned by reporters on the cost of living, Mr Morrison said his government was bringing real relief to Australians through a raft of measures including cutting the fuel excise, cash handouts to those on low incomes and income tax adjustments.

“Firstly, to cut petrol tax in half and that is providing real relief at the browser every day, every week right now,” he said.

“Secondly yesterday, $250 going out to those on fixed income support payments, pensioners and others in those situations to help them deal with these rising costs of living.

Scott Morrison Ally Langdon has Coalition lost control of economy?
Soaring inflation has become a key election issue. (Today)

“We know those costs of living increases are real and we are taking action right now, providing real relief right now, because we have been able to have a strong economic plan that put us in a position to do that in this year’s budget.”

However, Mr Morrison was challenged on the fact that all of the measures he mentioned were temporary.

“You don’t just spend money forever,” he said in reply.

“What you do do is you make wise investments, you make strategic interventions to ensure you can limit the impact of things that are well beyond your control.”

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