The concept of normal has been lost in the post-pandemic world

Normal is within spitting distance.

That might not exactly be the way Reserve Bank governor Philip Lowe put it in his statement explaining why the official cash rate was being pushed up another 0.5 percentage points on Tuesday, but it was the general vibe.

The trouble is the concept of what is normal in terms of monetary policy has been lost over the past decade or so.

The Reserve Bank is trying to get interest rates back to normal. But many people believe there is a new normal.Credit: Louie Douvis

Ever since central banks slashed interest rates to deal with the global financial crisis, what is considered a normal interest rate has been trashed. The COVID-19 pandemic made it worse as some central banks used negative interest rates while most, including the RBA, engaged in quantitative easing.

So what’s normal? Tuesday’s move took the official cash rate to 2.35 per cent. The last time it was higher than that was back in January 2015.

In that month, the jobless rate was 6.3 per cent and underemployment was 8.5 per cent.

Today, unemployment is at 3.4 per cent and expected to fall further. The underemployment rate is 7 per cent.

There were 786,000 Australians out of work back at the start of 2015 while the participation rate was 64.7 per cent. Today, there are 473,000 people in the official unemployment queue while the participation rate is at 66.4 per cent.

To argue official interest rates should be much lower than the now 2.35 per cent flies in the face of the strength of the economy.

There’s also one other big difference. The inflation rate seven years ago was just 1.3 per cent. Now it’s 6.1 per cent and climbing.

The RBA’s job is to reduce cost of living pressures by getting inflation back to its 2-3 per cent target. That’s why it is lifting interest rates, to deal with an economy awash with cash.

That’s not to say the Reserve – or every other central bank in the world – isn’t on thin policy ice.

The bank is in the midst of the most aggressive tightening of monetary policy since 1994, when it lifted the cash rate by 2.75 percentage points between August and December (and took the cash rate to 7.5 per cent).

Mortgages have been super-sized due to the ultra-low interest rates of the pandemic (and the government handouts at the federal and state level). Millions of people, especially those who have entered the property market over the past two years, are carrying record levels of debt.

The cumulative increase in the monthly repayments on that debt is around $1000 for someone with an $800,000 mortgage. By any measure, that is a big hit to take, especially when despite such low unemployment there has been muted movement in wage growth.

But the RBA keeps getting signs that the economy is so far withstanding higher interest rates.

Figures from the bureau of statistics on Tuesday showed spending by Australian households grew 18.4 per cent in the year to July.

Spending on discretionary goods and services is up almost 20 per cent while on essentials it has climbed by 17.1 per cent.

We’ve managed to increase spending on clothing and footwear by 45 per cent and hotels, cafés and restaurants by almost 35 per cent over the past 12 months.

Spending by households in the nation’s cafes and restaurants has climbed sharply over the past 12 months.Credit:Edwina Pickles

The people complaining the Reserve Bank’s higher interest rates are wrong-headed are doing so while decked out in new clothes and eating at their favourite restaurant, which is struggling to find enough staff to deal with the customers coming through the door.

The complainants bought into the idea that interest rates starting with a zero is the new norm. Sadly, that was only ever going to end in tears.

While it is still unclear what exactly the new norm is, Australia’s central bank and others around the world know it is not the ultra-low rates that were needed to deal with the biggest economic downturn since the Great Depression.

Those days have passed.

Cut through the noise of federal politics with news, views and expert analysis from Jacqueline Maley. Subscribers can sign up to our weekly Inside Politics newsletter here.

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