RBA interest rates: Michele Bullock just cost Australia the equivalent of a US nuclear submarine

Treasurer Jim Chalmers won’t do it, so Michele Bullock is going to have to wrestle the economy to the floor.

And that means tossing tens of thousands of people out of jobs. The Reserve Bank of Australia Governor is going to do that by imposing, starting today, what is in effect a tax on every one in Australia with debt, and many without it.

Although Ms Bullock won’t say this explicitly, the central bank wants more unemployed. It reckons too many well-paid Australians are driving up prices by buying things.

No one knows how high unemployment has to be to stop contributing to inflation, but Professor Richard Holden of the University of NSW reckons it is between 4.25 and 4.5 per cent.

The jobless rate in December was 4.2 per cent, which means up to 40,000 people would have to lose their jobs just to stop inflation accelerating, based on models used by central banks around the world.

On Tuesday afternoon, Ms Bullock described this horrible process of damaging lives in bloodless central-banker speak: “We’re trying to bring the labour market back into balance without overshooting.”

By overshooting, she means the Reserve Bank doesn’t want to toss an unnecessary number of people out of work.

Unlike the federal government, which is fuelling inflation by spending so much, the Reserve Bank can’t unilaterally fire a significant group of people.

So it imposed a interest rate hike today that will cost the economy roughly $3 billion to $6 billion, according to academic analyses cited by independent economist Chris Richardson.

Including spending changes in response to anticipated future increases, the impact could be around $7 billion, suggests Shane Oliver of AMP.

Subs, schools and cars

That means Ms Bullock and her board has just forced Australia to pay for the equivalent of a US nuclear submarine, 450 primary schools or 120,000 Ford Rangers.

But she needs to go further: the Reserve Bank wants inflation to decelerate. Last year’s 3.8 per cent figure is too high.

Which is why Professor Holden and many other economists predict there may be another two rate rises this year. “It’s going to be painful for people with variable-rate mortgages,” he said.

While home-owners get most of the focus when rates go up, they are far from the only ones affected. About 2.5 million Australians have car loans. Some three million have personal loans. There are an estimated 10 million credit cards in use.

Not all debtors will be affected straight away. The fortunate locked in rates last year, when the overwhelming perception was that rates would fall.

People who have paid off their homes won’t escape the effects. The property market, the core of Australian wealth, is acutely sensitive to interest rates.

No scenario

Whether home prices will stop rising, rise less quickly, or fall now is hard to predict. But in December SQM Research property pundit Louis Christopher predicted prices would rise at least 4 per cent and possibly 14 per cent this year in the eight capital cities. He presented four economic scenarios: none included rate rises.

(Mr Christopher plans to revise his forecasts in the next two weeks, a rare event.)

For leveraged property owners — especially those relying on renters to cover their mortgages — the nightmare scenario has arrived. Rates are rising, immigration is slowing and unemployment will be coerced upwards.

The worst hit may be those who lose their jobs and bought houses or apartments through the 5 per cent deposit subsidy that began in October. They could be left with negative equity: owing more than their property is worth, a danger Ms Bullock warned of when the scheme began.

Economies tend to move in cycles. A week-and-a-half ago Westpac’s top economist, Luci Ellis, identified a shift: Australians had started spending again.

After several years of stagnation, the average Australian was buying more, including televisions, cars, clothes, restaurant meals, sporting equipment and holidays, she realised after studying spending patterns.

Dr Ellis said it was “a genuine cyclical upswing in consumer spending”.

Even a small shift can have a big impact on the economy, affecting the wealth of almost everyone. Spending by people, as opposed to governments or companies, is responsible for about half Australia’s $3 trillion economy.

The Reserve Bank’s decision today marks the start of a campaign to stop Australians spending. It is unlikely to stop until that brief moment of economic sunshine is snuffed out.