A big week: Rates, Inflation and Super

It’s been an important week for the Australian economy.

Usually, in this space, I pick one issue and try to do it justice.

But today, I’m going to do something different.

Because three things happened that are worth talking about: the Reserve Bank raised interest rates again; we got another uncomfortable inflation number; and Trade Minister Don Farrell made some interesting comments about the role of our Superannuation savings.

They’re different issues.

But there are some threads running through all three.

So, let’s take them in turn.

First, interest rates.

Unless you’ve been living under a rock, you’ll know that on Tuesday, the RBA lifted the cash rate by another 0.25 percentage points, to 4.60%.

It was the fourth increase this year, taking the cumulative increase in 2026 to a full percentage point.

That hurts. 

For someone with a $500,000 mortgage, the four increases together mean roughly an extra $300 a month in repayments. On a $1 million mortgage, it’s more than $600.

Now, it’s tempting to blame the RBA.

But I think that risks missing the bigger issue.

The RBA has a job to do. Inflation is too high, and its mandate requires it to do something about that.

The problem is that we’ve effectively decided that the Reserve Bank should do almost all or just ‘all’?) of the heavy lifting.

And its primary tool – the official cash rate – is incredibly blunt.

It disproportionately hits people with mortgages. Renters can get caught in the crossfire. Savers can actually benefit.

Meanwhile, plenty of other Australians barely notice.

That’s why I keep coming back to fiscal policy.

A structurally-balanced Budget – where deficits in some years and offset by surpluses in other years – should act as what the boffins call an ‘automatic stabiliser’.

When the economy is weak, tax receipts fall and welfare spending rises, supporting demand.

When the economy is running hot, the reverse should happen: tax receipts rise, spending growth moderates and the Budget takes some heat out of the economy.

If that second half was working more effectively today, monetary policy wouldn’t have to do quite as much.

Which brings me to inflation.

On Wednesday we learned that annual headline inflation had risen from 3.5% to 4.0% in August. Trimmed-mean inflation – which removes some of the more volatile price movements – remained at 3.6%.

Some of that is coming from things largely outside Australia’s control.

Energy prices have risen sharply. The RBA itself pointed this week to global oil disruptions and the Middle East conflict.

But that’s not the whole story. The central bank also says there are still domestic capacity pressures, and businesses are reporting higher costs and raising prices.

There’s a temptation, whenever inflation comes from something we don’t particularly like or can’t easily control, to say: “Well, the RBA can’t fix that.”

And strictly speaking, that’s true.

Higher interest rates won’t produce another barrel of oil.

But that doesn’t mean we can simply ignore inflation.

Because higher rates can reduce demand, and hence price pressures.

Why does that matter?

Well, one of the nasty things about inflation is that the price rises tend to stick.

If inflation falls from 4% to 2%, prices don’t go back to where they were. They simply increase more slowly from the new, higher level.

That’s why getting inflation under control matters. The longer it remains too high, the more permanent damage it does.

But it also reinforces the earlier point: if inflation is important enough to fight – and it is! – surely we should be making sure we’re using all of the available tools rather than repeatedly reaching for the same, imperfect, inexact and blunt, one.

And that brings me, slightly unexpectedly, to superannuation.

Trade Minister Don Farrell reportedly suggested this week that Australian Super funds could invest in the US lamb industry as part of Australia’s efforts to head off additional American tariffs on our lamb exports.

In doing so, he said Australian superannuation funds had an obligation to the “national interest”.

There’s an important distinction worth making here.

Governments clearly have a responsibility to act in the national interest. That’s why they have powers over taxation, spending, regulation and trade policy.

Superannuation trustees operate under a different set of responsibilities. Among them is a legal obligation to act in members’ best financial interests. APRA has repeatedly reinforced the importance of that duty.

That doesn’t mean super funds shouldn’t invest in Australian infrastructure, housing, businesses – or, for that matter, American agriculture.

They should assess whatever opportunities are available.

And sometimes an investment that is attractive for members will also produce a desirable public-policy outcome.

Wonderful.

The important question is which way around the decision is made.

Does an investment stack up on its merits for members, with a national benefit as a welcome consequence?

Or does government first identify a national objective and then expect trustees to use members’ retirement savings to help achieve it?

Because that’s a very different thing.

And maybe that’s the thread running through all three issues this week.

Institutions have jobs.

The RBA has a job. Government fiscal policy has a job. Superannuation trustees have a job.

Those responsibilities sometimes overlap, and sensible policymakers should absolutely understand how they interact.

But accountability becomes harder when we blur them. Throw in a chunk of politics and self-interest and that blurring gets much worse.

We shouldn’t expect one mob to carry an unfair share of a problem simply because it has a convenient lever to pull.

Nor should we casually ask another group to take responsibility for an objective it wasn’t created to pursue.

Sometimes good economic policy isn’t about finding a clever new tool.

It’s about making sure the tools – and institutions – we already have are doing the jobs they are supposed to do. And not those they weren’t.

More bluntly?

I was pretty blunt in a TV interview this week. We can waste time trying to work out who is to ‘blame’ for inflation and higher interest rates. Or we can turn our minds to the best tools to use to get us out of the mess we find ourselves in.

Yes, the war in Iran has made inflation worse. But there are things that can be done, locally, to make it better.

Yes, interest rates are part of that. So is government taxation and spending policy. 

Yes, the national interest is important, but so are retirement savings. Government shouldn’t be leaning on private savings to replace their own responsibilities and actions.

(And that’s before we consider yet another smelter bailout, this time the Bell Bay smelter in Tasmania. Apparently it’s taxpayers’ money for smelters, but Super for trade disputes…)

And lest you think I’m being partisan, we’ve had leaders from both sides of politics throwing money at bailouts, calling for subsidies and, yes, trying to use Super for their own ends.

What we need, is respect for institutions, and commitment to use the tools at our disposal for the purposes they were intended – that includes interest rates, fiscal policy and Superannuation.

Have a great weekend!

Fool on!

The post A big week: Rates, Inflation and Super appeared first on The Motley Fool Australia.

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