When there is discussion of interest rates in Australian newspapers, most of the focus is on the decisions of the Reserve Bank. That is understandable, as interest rates have increased 15 times under this Labor government.
But there is another interest rate that has increased by even more than the RBA’s cash rate over the past year. The interest rate on Australian government bonds has skyrocketed without many noticing.
In October last year, the interest rate on 10-year debt issued by the Australian government was 4 per cent. Today, it is just shy of 5 per cent.
A full percentage-point increase in the interest rate the Australian government pays would add $10bn a year to our interest costs.
This is more than the government expects to save from its NDIS cuts over the next four years.
The Australian government’s borrowing rates are now the highest in the developed world, higher than those of New Zealand, Canada and Italy. There is not enough focus on this and how it impacts all Australians.
For one, higher government borrowing rates flow through to the borrowing costs of our banks, and they will, over time, force the Reserve Bank to raise rates too.
That means we will all pay if the Australian government cannot convince investors to hold its debt at lower rates.
Not all of the increase in interest rates is the government’s fault, but I will come to the government’s role.
The major event in financial markets in recent years has been the unwinding of the so-called yen carry trade.
For decades, the Japanese government held interest rates at near-zero levels. This encouraged investors to borrow at cheap rates in yen, convert the money into Australian dollars or other currencies, and then lend the money at a higher interest rate in those markets.
Through this effect, the Japanese government’s easy-money policies lowered interest rates right across the globe.
But in the past few years, the Japanese government has begun raising interest rates – Japanese government borrowing costs have more than tripled over the past two years.
This has led to concerns about the exposure of those invested in the carry trade to movements in currency values. It has also led to a reduced supply of capital to Australia and has therefore helped push up interest rates.
This week saw a dramatic escalation of those concerns. For the first time in almost 30 years, the US government intervened to support the value of the Japanese yen. Reportedly, this was in response to concerns that Japan would begin selling US debt and put pressure on US interest rates. The US has $40 trillion in debt. About a third of the US’s marketable debt will mature over the next year which is much higher than normal.
These developments are outside the Australian government’s control, but what we can control is how we prepare for the obvious risk of a rocky time ahead in global financial markets. What a rational government should be doing is restraining its own spending – and therefore its borrowing – increasing incentives to invest in Australia and promoting policies that increase productivity, so that businesses can still operate even if interest rates rise.
Instead, the Australian government has been doing the exact opposite of what the economic doctor would order.
