We means-test so many other policies, so why not monetary policy?
I’ve been asked many times in this rising interest rate environment: why can’t interest rate increases be means-tested to protect low-income families?
It’s a good question.
Interest rates and financial stress
The Reserve Bank’s cash rate is really just the benchmark, or foundation, for interest rates here in Australia. Ultimately, it’s up to the banks how they pass that on to borrowers, and what margin they add on top.
Borrowers do have some power to influence the rate they pay on their loans … by shopping around, using a broker, negotiating with their bank and making sure they have a good credit rating to negotiate the best deal.
That’s why you can’t really means test the RBA’s cash rate decisions.
That said, the cash rate is the only lever the Reserve Bank has to pull. The federal government, on the other hand, has a whole range at its disposal. And the RBA has – in its very polite, central bank way – been quite critical of government policy, particularly big spending that keeps demand high.
The RBA is basically saying the federal government is using its levers to fuel inflation, not fight it. Spending is at record levels, which increases demand, pushes up prices and forces the RBA to lift rates to try to bring inflation down.
Why it hurts Australian’s so much is that, unlike most other countries in the world, we overwhelmingly take out variable home loans so rate hikes are felt immediately. In the US, for example, most home loans are fixed for 30 years, so rate changes don’t hit households in the same way.
That said, the idea of targeted support for lower-income and first-home borrowers isn’t completely untested. Hungary and Poland have both offered subsidised mortgage programs. In Poland, eligible first-home buyers can access a fixed mortgage rate of around 2 per cent for up to ten years. The government then pays the lender the difference between that rate and the market rate.
The RBA’s seesaw
The RBA has just two jobs: keeping inflation low and unemployment in check — and only one main lever to do it: interest rates. The government, however, has far more tools at its disposal and needs to start using them more effectively.
First, it has to rein in spending. Right now, it’s adding demand to the economy – the exact opposite of what the RBA is trying to do. When the government artificially reduces petrol prices or hands out energy rebates, the RBA may have to keep interest rates higher than they otherwise would be to offset the inflationary impact.
If we want to get inflation under control without putting all the pressure on young borrowers and small businesses, that dynamic needs to change.
The federal government has to help the RBA in its inflation fight, not hinder it.
One more thing …
If interest rates rising are causing your family to experience financial hardship, your lender is legally required to offer you assistance. Please call them.
It’s also a good idea to speak to a financial counsellor as early as possible. They can help you understand your options, create a budget, and deal with creditors on your behalf. The National Debt Helpline offers free advice to people struggling with bills, fines, and repayments. Call them on 1800 007 007.
