An open letter to the Governor of the Reserve Bank

Ms Michele Bullock, Governor, Reserve Bank of Australia

Dear Governor,

I’m writing to you publicly because millions of Australians are crying out right now… and because on 29 September a great many of them are likely to be handed a bill they did little to run up.

The case your board will consider on 29 September looks straightforward enough. The June quarter national accounts came in hotter than expected: growth of 0.4 per cent against a forecast 0.3, and 2.1 per cent over the year against forecast 1.8. Underlying inflation is still 3.6 per cent, above your target band. Oil has surged towards US$100 a barrel, and every motorist and truckie is feeling it at the bowser. You told the House economics committee that the upside risks to inflation “appear to be materialising”. All four big banks now expect you to move, and money markets are pricing in an 88 per cent chance of a hike.

I don’t dispute your mandate, and I don’t envy the situation you face. But before your board votes, I’d ask you to look closely at who generated that worryingly high level of growth.

It wasn’t households.

Household spending crept up just 0.4 per cent, and almost half of that was a 10.3 per cent jump in car purchases as families moved into electric and hybrid vehicles… Australians spending money in order to spend less money on petrol. That is hardly an exuberance. That is a family at a kitchen table with a calculator. The saving ratio rose to 6.5 per cent. Business investment went backwards. As the ABS put it, growth “remained subdued in the June quarter as households continued to behave cautiously.”

And it has only got tougher since. Unemployment rose to 4.5 per cent in July, the highest since the pandemic, with 15,800 jobs gone in a month. Business conditions have turned negative for the first time in six years. Consumer sentiment has dropped more than 5 per cent. That is not an economy running hot.

So who did the growing? Government, and not by a little. Commonwealth government spending has climbed to 26.8 per cent of GDP… the highest level outside the pandemic since 1986. State government spending isn’t helping either. The public sector has also.

Public sector wages grew 3.4 per cent against 3.1 in the private sector. ABS CPI data suggests government-influenced prices have been rising much faster than market-driven prices, with categories such as childcare, education, healthcare, utilities and insurance doing much of the work. In other words, some of the stickiest price pressure isn’t coming from shoppers splurging… it’s coming from prices governments set, subsidise, regulate or index.

Governor, that last point deserves emphasis. A meaningful slice of the inflation your board is trying to contain is not being generated in a shopping centre. It is being set in a cabinet room.

Then there’s oil. I know fuel is front of mind for your board, and fair enough. But a petrol price shock is already a tax on every household. It strips spending power out of the economy without you lifting a finger. A rate rise won’t pump a single extra barrel, or fix a thing in the Middle East. It simply hits the same kitchen table twice.

Which brings me to the fairness problem at the heart of your job.

Your rates instrument reaches roughly a third of households… those with a mortgage… plus the small businesses on variable overdrafts. It does not reach a state infrastructure pipeline. Treasurers do not refinance. Premiers do not take a call from the bank. There is no margin call on a business case. So when public demand runs hot, the correction is paid for entirely by the people who already stopped spending.

And they have paid. Australians have absorbed three rate rises this year, taking the cash rate to 4.35 per cent. Interest payments now consume 5.8 per cent of household gross income… higher than the 5.7 per cent peak of 1990, when mortgage rates were near 17 per cent. Today’s borrowers are carrying a heavier interest burden than the generation we all cite as the horror story.

Households complied. Governments didn’t seem to. Yet only one of those two gets the higher interest rate bill.

Governments will say they are paying more interest on their debt as well. Actually we, as taxpayers, pay their interest bill… and why aren’t they cutting spending to pay down debt like most households are? The facts are, they’re doing the opposite.

I’m not asking you to breach your independence, and I’m certainly not asking you to lecture elected governments on what they should fund. Defence, health, aged care, housing and the NDIS are not luxuries. But I am asking you to use the one power you unquestionably hold: the authority of plain speech, backed by numbers.

Four things, Governor.

Quantify it. Publish, in every Statement on Monetary Policy, an explicit estimate of how much of the cash rate is attributable to Government spending fuelling demand. Not a hedged paragraph… a number, prominently placed.

Publish the counterfactual. Show Australians where the cash rate would sit today had public demand (Government spending) grown in line with nominal GDP instead of ahead of it.

Ask for a fiscal counterpart. We have a Statement on the Conduct of Monetary Policy, signed by you and the Treasurer. Ask for its twin… a fiscal statement signed by federal and state treasurers, committing to a public spending path consistent with your inflation target, with the Bank reporting publicly on whether it’s met.

Say it out loud. At your next appearance before the House economics committee or at your post board meeting press conference, describe the trade-off in the language of a mortgage repayment, not a forecast chart. You have been more candid than your predecessors. Go further.

Compare the Market figures show that someone with an average loan of $735,000 has seen their monthly mortgage repayments increase $351 since the start of the latest rate hike cycle. That’s an extra $4212 they’ve got to scrape together over the course of a year.

You have been dealt an economy in which the sector most responsive to your interest rate lever is the one least responsible for the problem. That is not your failing. But it is within your responsibilities to make sure Australians know it.

If your board must move on 29 September, please do them the courtesy of naming who forced your hand. Oil is only part of the story.

Yours respectfully,

David Koch, Economic Director Compare the Market