Koch’s searing open letter to RBA boss as rate rise looms

Australians are paying for an inflation bill they haven’t run up, and mortgage spending has outpaced the “horror story” generation of 1990, Compare The Market’s economic director David Koch has warned in a searing open letter to the Reserve Bank.

Koch said another interest rate hike by the RBA board appeared increasingly likely on September 29, but he called on Governor Michele Bullock to explain why households will foot the bill when, he claimed, it was government spending driving inflation.

“There’s an increasing likelihood a great many Australians are likely to be handed a bill they did not run up,” Koch said.

“Before the board votes, I’d ask it to look closely at who generated that worryingly high level of growth. It wasn’t households.”

Koch said household spending had increased just 0.4 per cent, almost half of which was due to families switching to electric and hybrid vehicles to cut their petrol bills.

“That is hardly an exuberance. That is a family at a kitchen table with a calculator,” he said.

Savings rose 6.5 per cent and business investment went backwards, while unemployment rose to 4.5 per cent in July, the highest level since the COVID-19 pandemic.

Read more

Australia handed bleak 40-year outlook with deaths to outnumber births

“Business conditions have turned negative for the first time in six years. Consumer sentiment has dropped more than 5 per cent,” he said.

“That is not an economy running hot.”

Instead, Koch claimed, the biggest driver of spending were federal and state governments.

Commonwealth government spending had climbed to 26.8 per cent of the GDP, he claimed, the highest level since 1986 - excluding the pandemic years.

Public sector wages also grew faster than the private sector, and Koch cited ABS CPI data to suggest “government-influenced” prices, such as for childcare, education, healthcare, utilities, and insurance, were surging higher than “market-driven” prices.

“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,” Koch wrote.

After three consecutive interest rate rises from the RBA earlier this year, Koch said interest payments now constituted 5.8 per cent of household gross income - higher than the 5.7 per cent peak of 1990, when mortgage rates were at nearly 17 per cent - compared to 4.35 per cent currently.

Koch acknowledged the difficulty of the economic conditions the RBA faced, and its mandate to reduce inflation.

“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,” he said.

“Defence, health, aged care, housing and the NDIS are not luxuries.”

But he urged Bullock to acknowledge in her post-meeting speech how much government spending had contributed to inflation, where the cash rate would otherwise sit, whether a fiscal statement should be signed by the federal and state treasurers, and the likely impact on Australian households.

“Households complied. Governments seemingly have not. Yet only one of those two gets the higher interest rate bill,” Koch said.

“If the board must move on 29 September, please do Australians the courtesy of naming who forced your hand.”

In the meantime, Koch said, Australian mortgage-holders should prepare for another rate rise.

A lift of 0.25 per cent could add about $93 a month to repayments on a $600,000 loan.

Koch urged borrowers to call their lender and negotiate, as well as compare their home loans and utility bills against competing offers to ensure they were getting the best possible deals.