Picture a young couple in early 2021. They’ve been saving for years. Interest rates are at record lows, and the Reserve Bank has just said it doesn’t expect conditions for a rate rise to be met until 2024 at the earliest. So they stretch, borrow and buy their first home. Everyone around them is doing the same. In 2021, home values rise 22 per cent.
The money behind that boom came from somewhere. In March 2020, as the pandemic hit, the Reserve Bank cut its cash rate to 0.25 per cent, targeted the same yield on three year government bonds and began buying bonds. In November it went further. The cash rate fell to 0.1 per cent, and it launched a formal bond buying program with newly created money. By February 2022, that program alone had bought $281 billion worth. The bank also lent banks $188 billion at ultra low rates.
Few saw what came next. In November 2021, a survey of Australia’s top economists concluded there would be no prolonged high inflation and no rate hike in 2022. Six months later, rates began to rise. Inflation climbed to 7.8 per cent by the end of 2022, the highest in more than three decades. The Reserve Bank raised rates thirteen times, taking the cash rate to 4.35 per cent by November 2023. For our couple, and hundreds of thousands like them, repayments jumped month after month. They had done exactly what the central bank encouraged.
What caused that inflation depends on who you ask. Mainstream economists point mostly to supply shocks, from pandemic shipping bottlenecks to the energy spike after Russia invaded Ukraine and floods that pushed up food prices. Austrian economists agree those shocks raised some prices, but argue they can’t create broad, lasting inflation on their own. That takes more money, and the pandemic delivered a lot of it.
On 28 November 2022, Governor Philip Lowe sat before a Senate committee and was asked whether he owed Australians an apology. “I’m certainly sorry if people listened to what we’d said,” he replied.
The bank’s own reviews didn’t hide the damage. It called its exit from the bond yield target “disorderly” and admitted it caused reputational damage. In the 2021–22 financial year it booked a $36.7 billion accounting loss on its bonds, leaving its equity in the red. It estimated the program would cost between $35 billion and $58 billion by 2033.
To be fair, unemployment fell to 3.4 per cent in July 2022, its lowest in almost 50 years, and the bank argues its actions helped. But look at the shape of it. The same institution created the money, told people rates would stay low, then raised them to fight the inflation that followed. And this year, the cash rate has risen four more times, to 4.60 per cent. Who pays for the mistakes of the people who make the money?
Tomorrow, the man who invented private digital cash in 1982, and why it failed. Follow and ring the 🔔 on our profile so you don’t miss a day.