BEN HARVEY: Don’t expect interest rates to go down much soon. Or ever

Three economists line up at the pub to throw darts at a board.

The first misses to the left. The second misses to the right. The third says “bullseye”.

This (average) gag about the shortcomings of the dismal science is a nod to the preference of many economists to focus on trends and averages rather than precise predictions.

Economics is a broad-brush pursuit, with a few conspicuous exceptions.

One of those concerns the economic phenomenon that dares not speak its name — recession.

That is defined very specifically as two consecutive quarters of negative growth.

Let’s set aside the absurdity of the phrase “negative growth” and think about a bigger absurdity — our terror at hearing the R-word.

Consider two scenarios.

In the first, the economy contracts by 0.2 per cent in the September quarter and again by 0.2 per cent in December.

In the second, the economy grows by 0.1 per cent in September but then contracts by 4 per cent at the end of the year.

It’s pretty obvious that option one is a better outcome for the economy, but politicians would quietly prefer option two.

Jim Chalmers does not want to be the first treasurer since Paul Keating (outside the economic absurdity of the pandemic) to usher in a recession.

He might not have a choice.

Tuesday’s interest rate rise was historically abnormal, according to an analysis of the past two decades’ worth of Melbourne Cup day decisions.

The heady days of the mid-noughties saw the economy start to overheat, which is why we copped hikes in 2006 and 2007.

A cut in 2008 on the eve of the global financial crisis was followed by increases in 2009 and 2010. Yep, in the depths of the global financial crisis, as the rest of the world endured austerity measures, we were actually trying to rein in our economy.

It wasn’t until 2011, a full three years after we first heard the phrase “toxic debt”, that the Reserve Bank cut rates in a bid to boost activity. For the next eight Melbourne Cups, rates remained unchanged.

The pandemic forced the Reserve Bank to cut rates at the 2020 meet. The bank’s governors held steady at that level in 2021 before raising rates in 2022 and 2023 as inflation took off courtesy of a pandemic-ravaged global supply chain.

The bank sat on its hands in 2024 and 2025 and raised rates to 4.85 when Point of Law thundered home this week.

On the past 21 Melbourne Cup days, the Reserve raised rates six times, cut thrice and held even a dozen times.

So, Tuesday’s hike was unusual.

The 4.85 per cent rate that Michele Bullock raised the official rate to is also abnormal.

Many readers will think it’s abnormally high and will be wondering when things will “go back to normal?”

Economists don’t ever talk about things “going back to normal” because they like to converse in a confusing language that makes them appear smarter than they are.

To the end they talk about “reversion to mean”. That’s a fancy way of saying that eventually, every financial measure will return to its long-term average.

It is a financial theory proposing that after extreme price changes, asset values always return to long-term average levels.

That what always was will, eventually, once again, be.

Here’s a dose of cold water for anyone hoping for the good old days — you’re in them.

The median official interest rate in Australia over the past 35 years is 4.75 per cent. At 4.85 we are only fractionally above that which always was.

We need to get our heads around the possibility that an official rate in the high fours, and subsequent standard variable mortgage rate of around 7 per cent, is the new normal.

Anyone paying off debt in Australia over the past third of a century would have taken 7 per cent in a heartbeat.

The past two generations of homeowners have been spoiled by the ultra-low rates that came courtesy of the worst economic calamity since the Great Depression.

Just when it looked like the number of buyers might be the same as the number of sellers, someone got sick in Wuhan and rates were subdued as the world dealt with the worst health crisis since Spanish Flu.

Those events were what economists call “statistical outliers”.

A generation of homeowners is about to discover that reality bites.