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It’s time to reposition the Reserve Bank of Australia’s (RBA) inflation target, according to the financial and business expert.
Speaking to Phil Tarrant on a recent podcast, Mark Bouris, who is a director at Yellow Brick Road, conceded that while the central bank’s inflation rate target of 2 per cent to 3 per cent — first established in 1996 — is reasonable over the medium term, he expressed his belief that a more reasonable alternative short-term goal should be implemented.
“I would suggest a realistic inflation target is something closer to what our wage price increases have been,” he said.
With wages increasing “at a rate of somewhere between 3.5 per cent to 4 per cent,” the financial guru suggested, “The inflation number that we should be chasing, that is the trimmed mean inflation or the adjusted inflation should be somewhere close to what the wage-price increase is.”
In his estimation, shifting the near-term goalposts could potentially strike a balance between avoiding long-term inflation, as experienced in the late 1980s, and achieving “no reduction in the standard of living of Australians.”
“Because at the end of the day, that’s what inflation and gross domestic product (GDP) and interest rates [are about]. It’s all about maintaining the standard of living. That is all we should be interested in, policy-wise.”
“We don’t want to reduce the standard of living of any Australian, either through inflation or through super-high interest rates that just kill people off, mentally destroy them, or put them in a situation where they have to sell their house,” he stressed.
Since May 2022, the RBA has enacted 10 consecutive cash rate increases in what has been the swiftest and largest hiking cycle in national history, a strategy that has seen the figure soar from a record low of 0.1 per cent — maintained for almost 18 months through the thick of the COVID-19 pandemic — to 3.60 per cent.
The bank’s latest decision has opened it to criticism from many in the housing industry, particularly due to the financial impacts of the consistent cash rate increases testing mortgage owners and the housing market alike.
Mr Bouris shares these sentiments, calling out the RBA’s monetary policy tightening cycle as punishing “only one segment of the marketplace: mortgage holders.”
Since the initial cash rate increase nearly 12 months ago, a $600,000 mortgage holder would have experienced a $1,100 repayment increase. That sum increases even more on larger loans. Furthermore, data from the Compare Club published earlier this month found a 42 per cent increase in the number of Australians residing in mortgage prisons since the RBA’s first rate rise last May.
Despite a majority of Australians feeling the adverse impacts of increasing interest rates in their hip pocket, Mr Bouris insisted inflation is caused by governments, not consumers.
“Consumers only spend what they can afford. They’ve got their wage, they’ve got their normal day-to-day expenses and it might be a mortgage, or it could be rent, and they spend what they’ve got left over.”
“If you dump a whole lot of money on them and try and stimulate them to spend, they’ll spend,” he said.
Mr Bouris added that Australia should “have a more achievable near-term inflation number, and that should be something that does not reduce the standard of living nor increase the standard of living, just maintain it.”
“Surely, there’s a better way of doing this, and if it is just changing the target for a short period of time to some more achievable number [that doesn’t] result in us having nothing to go up [in] any more interest rate increases,” he concluded.
Listen to the full conversation here.
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