Tag: fuel prices

Squeezed between inflation and interest rates

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The Australian cash rate since 1998 (Reserve Bank of Australia chart)

I just happened to be reading a novel set in the Edwardian era at the same time as the media was going bonkers (again) about the Reserve Bank raising interest rates by 0.25% to 3.6%. In Louis de Bernieres’s* book, The Dust That Falls from Dreams, one of the characters is holding forth about the sudden rise in the bank rate and subsequent collapse of the share market in 1914.

Hamilton McCosh, a daring entrepreneur and investor, is at first delighted when the bank rate goes to 4% because he has ‘a few bob invested here and there’. Then the rate doubles to 8% and quickly rises to 10%.

“Just as I was gleefully rubbing my hands the blighters closed the Stock Exchange”, he tells his pals at the Atheneum, a gentlemen’s club.

This is late July 1914, you gather, a few weeks before World War I broke out. McCosh didn’t know then that the stock market would stay closed for five months. Rather than cause inflation, this financial crisis functioned like the ultimate credit squeeze. Inflation stayed low, well at least until 1915, when it rose rapidly to 12% then to 25% in 1917.

In the pre-war period, De Bernieres’s McCosh is aghast – you can’t get credit anywhere and there’s a rout on the stock market. “What’s Serbia got to do with us?” he complains.

In 2023 you could insert “Ukraine’“and immediately realise that we have seen cycles like this before. In times of war, the supply of money is tested, oil is expensive and hard to source, there is much unemployment, securities can’t be sold and supplies of necessities are dwindling.

The 1914 financial crisis in the City was a liquidity crisis of massive proportion, the likes of which was not seen again until 2007/2008. Amidst much intervention by the government and the Bank of England, the day was ultimately saved.

In De Bernieres’s novel, McCosh regroups and singles out two stocks he thinks will do well – Malacca Rubber and Shell Oil (as he calculates where money will be spent in the war effort).

Self-interest and venality arises quickly whenever a country’s financial welfare is threatened. Survival of the shiftiest is the order of the day.

At this point in time, many of Australia’s mortgage holders must be in a state of anxiety as yet again the goal posts are moved.

Not that the RBA had any option. Monetary policy is under pressure from forces beyond the Reserve Bank’s control. We are not the only country where inflation and interest rates have risen sharply. You can chart the increases in Australia back to the onset of a pandemic in March 2020, then steeply rising since Russia’s invasion of Ukraine, in February 2022.

The impact of Covid is what initially sent the cost of living index soaring. From March 2020, when it was 2.2%. Inflation rose steadily through the Covid years, driven up by stock shortages, the impact of bushfires and floods on production, disruptions to supply chains and the ever-rising cost of fuel.

Inflation reached 7.3% in the September quarter of 2022, about six months after Russia invaded Ukraine. The RBA now thinks inflation may have peaked (at 7.8% in December 2022). But as ABC business reporter Peter Ryan observed, the March quarter figure will be the one to clarify matters when released on April 23. Wherever it rests, Australia’s inflation rate is a long way north of the 2%-3% range promised in 2019.

When inflation rises, central banks almost always use monetary policy to beat it into submission. This week’s interest rate rise – the 10th in a row,   takes the official cash rate to 3.6%.

As Peter Martin observed in a timely piece for The Conversation, Tuesday’s interest rate hike was the culmination of a process that has added $1,080 to the monthly cost of payments on a $600,000 variable mortgage.

Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University, calculated this increase ($12,960 per year) by comparing payments on the National Australia Bank’s base variable mortgage rate before the Reserve Bank started its series of hikes in May 2022.

Before the Reserve Bank began raising the cash rate, the base variable rate was 2.19%. It’s about to be 5.49%, pushing up the monthly payment on a $600,000 mortgage from $2,600 to $3,680.

The Reserve Bank acknowledges it is a “painful squeeze”, but hints it might not need to squeeze much harder.

There’s more pain across the ditch. NZStats revealed that the annual inflation rate for 2022 reached 7.2%. Housing and household utilities was the largest contributor to the annual inflation rate. This was due to a 14% hike in the cost of building a house and rentals also rose.

As if to demonstrate its independence from the government of the day, New Zealand’s Reserve Bank pretty much ignored the impact of Cyclone Gabrielle. While all around people were shovelling silt out of their houses, the RBNZ increased the cash rate from 4.25% to 4.75% on February 22. This was a more dramatic increase than seen this week in Australia. But New Zealand is anxious to suppress the spiralling cost of housing. You’d think a country which is over-endowed with pine forests would have this covered, eh?

I guess the new UK prime minister will want to take credit for the drop in inflation recorded in January (8.8%) compared with 9.7% in December 2022. The Bank of England Governor has warned that it may need to raise rates again if inflation re-asserts itself. After 10 successive increases since December 2021, the official rate is at 4%. Meanwhile in the US, the Federal Reserve is flagging higher and faster rates rises (4.75% in February), despite inflation dropping below 7%.

Why does all this matter and who does it matter to? If you are young, working and buying your own home, yet another 0.25% increase in the cash rate wrecks your household budget. Those who borrowed their deposit (from the Bank of Mum and Dad) will be desperate for another pay rise, as inflation eats into the recent 4.5% increase in wages.

As The Guardian reported just last month, almost 25% of borrowers were at risk of mortgage stress as of December 2022. Another 800,000 borrowers face higher repayments as fixed loans end later this year and revert to the variable rate.

Tim Lawless, research director at CoreLogic, says the clear reason for mortgage stress is that interest rates increased faster and earlier than anyone was thinking. (Whatever happened to the notion of buying a modest first home then upgrading as finances permit?Ed.)

“We are expecting that the rate of mortgage stress will push higher into 2023,” Lawless told The Guardian, “partly because of higher interest rates, but also because of the cost of living.”

Theo Chambers, chief executive of Shore Financial added: “People probably borrowed more than they could have today. With borrowing capacities down almost 35% from 12 months ago, these people wouldn’t get approved today.”

As for De Bernieres’s Hamilton McCosh, how is he supposed to earn a living in Edwardian Britain, he fumes, saddled with four children, a truculent wife and two mistresses current (one retired), all of whom have children to feed?

As the Norwegian playwright Henrik Ibsen once said, “Home life ceases to be free and beautiful as soon as it is founded on borrowing and debt“.

*author of Captain Corellli’s Mandolin

 

Pork barrels and billboards ahoy

pork-barrels-billboards
Image: Welcome to Queensland – an apolitical billboard

You can tell there is an election looming when the government promises to reduce the price of beer – a classic example of ‘pork barrelling’. The move to halve the excise on draught beer would save beer drinkers 30 cents on the price of a schooner (a New South Wales term for three quarters of a pint of beer).

Pork barrel, or simply pork, is a metaphor for the appropriation of government spending for localised projects, usually designed to bring money to a representative’s district.

According to Investopedia, the phrase ‘pork barrelling’ harks back to the 1770s when people who owned slaves gave them pork in barrels as a ‘reward’. Before refrigeration, pork was salted and preserved in large wooden barrels.

But in the cut and thrust of 21st century politics, the phrase now means trying to win votes by appealing to voters’ basest instincts.

Social media, being the untamed beast it is, was quick to condemn the wafer-thin beer excise promise. What about spirits and wine, they asked (not unreasonably). Sexist, said others. DISCRIMINATION, said another post (words in capital letters means shouting).

As pork barrelling goes, 30 cents off a schooner of beer amounts to little more than a head of froth. More to the point, we could use some excise relief on the cost of fuel, don’t you think?

On a five-day round trip towing a 14 ft caravan through New England and back last week, we totted up a $350 fuel bill . The most expensive diesel was sighted at Wallangarra on the Queensland/NSW border ($1.79.9 cents a litre). In Brisbane this week $1.85 seemed to be the going rate.

I’m surprised the government would even risk attracting attention to the $46 billion it earns through excise and custom duty on petroleum, alcohol and tobacco (budget projection for 2021-2022).

Election campaigns are usually fought over relatively lightweight matters such as the cost of beer or fuel. But as we all should know, there are more pressing matters, domestic and global.

Mike Scrafton, writing in Pearls & Irritations, says the media can play a role by simply not repeating the trivial utterances devised by politicians to seduce voters.

“Election campaigns never rise much above budgetary baubles, three-word campaign slogans, pork barrelling, name-calling and personal slurs, and straight-out deceptions. The electorate and the media have been conditioned to expect nothing more profound or visionary from their leaders.”

Scrafton, a former senior bureaucrat in the Victorian Government, was commenting on Scott Morrison’s National Press Club speech, which “typically infantilised voters and kept the focus on economic growth”.

“We’re facing a climate calamity, yet the PM believes Australians are more focused on the next holiday than threats to their children’s future.”

Scrafton says the federal election should be about global warming, increasing wealth inequality, irreversible environmental degradation, widespread species extinction and the seemingly inexorable march to great-power war.

FOMM feels obliged to add to this list the most immediate social issues of our times – housing affordability and our appalling treatment of refugees/asylum seekers.

Pork barrelling aside, even in these early stages, with the election yet to be called, the major parties are throwing out none-too subtle hints about what to expect.

In late January, Labor’s leader Anthony Albanese promised $440 million to help teachers and students navigate the challenges mounted by Covid-19. He is also promising a Royal Commission of Inquiry or similar into the handling of the pandemic. An Albanese government would also tackle Federal reform. At the time, Albanese skilfully scooted around questions about whether this would include an overhaul of the tax system.

Prime Minister Scott Morrison will continue to pledge financial support for smart technology, particularly that which can help meet our net zero climate change targets. The big question is can he keep to a 2019 promise to establish a Federal Integrity Commission? Ironically, Morrison was roundly defeated over an election promise he tried hard to deliver.

We can expect some kind of a re-run of the Religious Discrimination Bill, whichever party wins the election. It was Labor’s amendments (protecting the rights of trans students), that saw the bill shelved indefinitely. (Some wag suggested that ‘Scomo’ had suffered splinters from his own wedge. Ed)

Election promises often return to haunt the leaders who made them. The most egregious of broken promises was former Liberal Prime Minister John Howard’s distinction between ‘core’ and ‘non-core’ promises to explain why they did not materialise.

In 2014, Crikey compiled a list of the worst ‘porkies’, (as opposed to Pork Barrels. Ed) that is, political promises made and not kept. It is worth repeating that in 1995, John Howard said there would “never ever” be a GST then introduced one in 1999. This list makes fascinating reading at a time when we are being asked to trust what politicians tell us. The ‘porkies’ include then Health minister Tony Abbott’s promise before the 2004 election not to change the Medicare ‘safety net’ (This is meant to limit the annual amount a person must spend on medical treatment and medications before paying a subsidised rate- currently about $6 for a prescription.) After the election, the Coalition raised the ‘safety net’, leaving Abbott to say, “I am very sorry that that statement back in October has turned out not to be realised by events.”

Even further back, Bob Hawke’s 1987 pledge – “by 1990 no Australian child will be living in poverty” didn’t happen and still hasn’t happened.

Crikey’s investigative unit recently compiled a ‘dossier of lies and falsehoods’ – an analysis of 48 statements made by Prime Minister Scott Morrison. It’s here if you have the time and inclination. There has been no comment from the PM’s office.

As history shows, it is easier to offer voters something they will like, or promise not to do something they will hate, than it is to reveal complex policy ahead of the vote.

Honest politicians who come out with carefully costed plans to introduce necessary but controversial legislation don’t win elections. Remember John Hewson, who as Opposition Leader in 1993 lost the election to Paul Keating, after trying to sell a plan for a GST? Likewise former Labor Opposition Leader Bill Shorten paid the price in 2019 for campaigning on a long list of complex policies.

I am not expecting Anthony Albanese to fall into the same trap. Thus far, his modus operandi appears to be to criticise and rebut most things the government does or tries to do. The problem with that strategy is that voters don’t really know what he stands for, as this week’s Four Corners programme tried to establish.

While I was trying to escape to the bush and disengage from media, the Canberra protest filtered through via the all-pervasive ABC and social media. It did not surprise to learn that Clive Palmer’s United Australia Party has hitched its wagon to that loose collective. If you travel through the backblocks of New England, it is hard to miss the yellow and black colours of the UAP on billboards set in paddocks along the highways and byways.

“Freedom…freedom” is the common slogan. I’m pretty sure there is no link between that and the song by Beyonce and rapper Kendrick Lamar (the lyrics of which empower black women).

Nevertheless, the billboards are out there, spreading the gospel as understood by anti-vaxxers, sovereign citizens, religious zealots, conspiracy theory followers, ‘preppers’ and genuine if misguided people whose lives have been severely disrupted by Covid-19 controls and mandates. It falls to me to remind readers that protests like the one in Canberra last week happened simultaneously in places as far removed as Ottawa (Canada), Wellington (NZ) and Paris (France). Van Badham’s overview of the global movement is required reading if this issue troubles you – and it should.