Rising rates a catch-22

Interest rates have been the big political subject for more than a year, so it was great to talk to former Reserve Bank of Australia board member Mark Barnaba about this subject recently.

After a very accomplished executive career, Mr Barnaba is now a non-executive director across a range of boards and acknowledged that serving on the RBA board since 2017 until recently had proved an interesting time.

Perhaps the first phase of that – during a national downturn with a relatively low interest rate environment – was more benign, but the onset of the pandemic and its impact since the start of 2020 has been anything but predictable.

The crunching of interest rates around the world to zero (or thereabouts, depending on where you look) and the injecting of liquidity into major economies via quantitative easing was unprecedented.

As always, such mechanisms are blunt instruments and their impact can only be determined in hindsight.

Ultimately, the low interest rates, along with many other economic stimulants and other policies to limit job losses, had the desired effect. Australia, better than most, sailed through the pandemic with minimal economic casualties. Initially.

However, like a drug that turns someone into an addict, an economic and policy environment that encouraged business to borrow, workers to spend and homeowners to build had undesirable outcomes.

Coupled with pandemic-created supply chain issues and growing volatility thanks to Russia’s invasion of Ukraine, the combination of all those events has led to worldwide inflation.

So while the RBA’s reaction has been the talk of the past two years, there was one nugget in my conversation with Mr Barnaba I thought I would share because it seems lost in the noise.

Naturally, savers hate low-interest rates, especially those who are living off their wealth rather than building it through asset accumulation.

The inflation low rates helped cause is equally a threat because it erodes the living standards of those who have saved.

Savers are generally quieter people than mortgagees. A pensioner whose annual income has been reduced because of low interest rates is not nearly as politically unpalatable as a family being tossed out of their home because they can’t afford the mortgage.

The nugget in this is that the balance of these two important groups in a cohesive society is changing.

Mr Barnaba said mortgagees traditionally represented two thirds of people most directly affected by interest rate movements, whereas savers were just one third.

That meant that not only were savers’ problems less noisy in the political environment, but they were also in the minority.

But that has changed.

Mortgage holders and savers now face off, in terms of numbers, as relatively equal.

That changes the politics of using interest rates as a weapon against inflation.

While that has not exactly been obvious in the way the interest rate argument played out, it does change the dynamic in so many ways.

It may explain why we hear more about the cost of living than we do about mortgage rates.

Rising interest rates may hurt mortgagees directly but the increase in the cost of goods and services from the inflation the rate rises are trying to thwart is noticed by everyone.

The rise of the saver class is fascinating. In the past, many Australians bought their home, sought to pay off the mortgage, and relied on the sale of that asset as a major funder of their retirement, along with a government pension.

But the government foresaw the ageing population as Australians lived longer, as well as their desire for earlier retirement, and introduced compulsory superannuation.

For more than 30 years we have been forced to put aside some of our income until we quit work.

As more and more Australians retire and go on to live long lives as superannuants, they are swelling the ranks of savers living off their liquid assets.

It is intriguing that these people remain relatively voiceless when it comes to economic policy and the politics surrounding that.

For now, at least.