He is one of the least empathetic of beings, a cold fish, bothered and irritated. Captured by the cradle of numbers (he is an economist); obsessed by the spreadsheet of projections that may never result, there is not much to recommend the chief of the Reserve Bank of Australia, Philip Lowe. Come to think of it, there is not much to recommend any of them, these high priests and priestesses, all of the same, pontificating cathedral.
What stands out regarding Lowe is his almost heroic lack of tact. He will forever be saddled with those remarks that encouraged many Australians to rush to the banks to take out loans. When asked at the National Press Club in February 2021 about his “pledge” not to raise the cash rate for at least three years, Lowe was defiant: “I haven’t pledged anything”; 2024 was merely a “best guess”.
The bank’s own internal review, published in 2022, noted that the RBA board had indicated in late 2020 and much of 2021 “that the first interest rate increase was not expected for ‘at least three years’, and then not until ‘2024 or later’.”
The confident assertion by Lowe and fellow board members proved to be a spectacular howler. “Given the outlook was highly uncertain, the board could have given more consideration to potential upside scenarios, including scenarios that could warrant raising the case rate earlier than anticipated.”
Of late, Lowe has done himself few favours. The RBA has presided over twelve increases in the cash rate; the current benchmark interest rate lies at 4.1%, with promises of further hikes. It is the highest level since April 2012.
In his cold fish style, Lowe has openly suggested that people could “cut back on spending, or in some cases, find additional hours of work, that would put them back into a positive cash flow position.” While social media is not exactly the ideal barometer at the best of times, a collection of remarks is worth noting. “Regardless of if you are left leaning, centre or right, everyone has a reason to hate this guy,” states a certain Chazwazza. Andrew Hughes (if that be his name) suggests that economists brush up on their “EQ courses in what they teach. Because people are those numbers.”
In short, the Reserve Bank, and other central banks vested with such powers, are often there to make lives miserable on the pretext of improving them. The error never lay with the public: they were told to shut up and shut shop for months, avoiding family, friends and life. All that time, government stimulus – for the fortunate – found their way into bank accounts, much of it unspent. The time for inflation was surely bound to come.
The picture of inflation, however, was always going to be more complex. In that regard, the RBA is curiously unimaginative in reading inflationary pressures, showing a continued fixation with wages and labour costs. While rising wages can tease the inflationary demon, what about other sectors of the economy, such as corporate profits? Not so, say a number of business leaders, adamant that companies are being unfairly singled out for embracing the profit motive.
The Australia Institute has a rather different view on this. Through its Centre for Future Work, it published a report in February arguing that 69% of inflation beyond the RBA’s target band of between 2% and 3% could be put down to burgeoning corporate profits. “Rising unit labour costs account for just 18% of that inflation.”
The post-COVID inflation phase, characterised by a decline in real wages, labour share of GDP, and record corporate profits stood in sharp contrast to the 1970s, when the opposite effects were felt. “This historical comparison confirms that fears of a 1970s-style ‘wage price spiral’ are not justified. Instead, inflation in Australia since the pandemic clearly reflects a profit-price dynamic.”
The report, authored by Jim Stanford, did something Lowe obstinately refuses to do: consider the resources sector, Australia’s single most dominant economic performer, as part of its economic analysis. “For the first time, in 2022,” states Stanford, “mining profits accounted for over half of all corporate operating profits in the entire economy.” But in Lowe’s analysis, revealed in his National Press Club address delivered in April, “the share of profits in national income – excluding the resources sector, where prices are set in global markets – has not changed very much over recent times.”
The obvious logic of the Australia Institute irritated the RBA as being a touch cute in its methodological assumptions. Stanford’s paper duly made the rounds in internal discussions. A briefing note from the RBA’s domestic activities and trade section claimed that, “Profits and inflation do not have a direct accounting relationship. To examine the profit-inflation relationship properly, one requires a model and a measure of markups.” Another RBA report, examining web data gathered from 58 firms and 25 million unique items, concluded that “rising prices tend to be associated with lower margins.”
In what could only be seen to be a campaign launched on behalf of big business and its followers, calls for repudiation and recanting followed. Economics academic Richard Holden demanded that the Australia Institute “admit their mistake and retract their so-called analysis.”
There was just one problem with the criticism of Stanford and company. Far from being methodologically unsound, other notable bodies had embraced it. As part of its 2023 Economic Outlook, the OECD, on decomposing the GDP of 15 nations, found “a significant part of the unit profits contribution has stemmed from profits in the energy and agriculture sectors, well above their share of the overall economy, but there have also been increases in profit contributions and manufacturing services.” It also found that “a large part of the higher unit profits contribution originates from mining and utilities, even in commodity-importing economies.”
Earlier this month, the President of the European Central Bank (ECB), Christine Lagarde, also focused attention on the role played by galloping corporate profits in pushing up inflation. The data on corporate profits, she rued, was simply not as good as it was on wages.
On this score, the economic managers in Australia have revealed themselves as callous and conservative. Bedazzled by the extraction industries and unable to pursue a productive agenda, they continue to wage war on those irritating wage earners who demand absurdly modest increases to keep pace with inflation. As long as Lowe and the RBA are allowed to do it, more harm is in the offing.
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Somebody out there is being cute !
I have several times posed the question : where is it mandated that interest rates on existing home loans must go up every time the RBA lifts their reference rate.
The glib response from the trading banks is : ‘because it’s a variable rate mortgage and we can do what we want during the term of the loan’.
So the next question is, why is it a variable rate loan and the glib answer is ‘because, unlike other countries we only offer variable rate loans – with the occasional concession sometimes for a three or perhaps five year fixed rate loan’.
So, what is the economic rationale for increasing the rate on existing loans :’ the banks say, because we can and it adds to our bottom line.’
We need a complete restructure of the RBA and our banking regulations !!
lf the RBA , or its public cold-fish face- can guess so spectacularly wrong, why should any sensible person now accept the accuracy of their present decision making , stalled as it is on an outdated model of inflation ? Why indeed do they insist that borrowers should bear the full burden, though it increses the pain of inflation even more for this subset ? l fail to see the logic here , and feel for the special pain of young familes and those who will lose jobs and be further composted .
Great piece, thank you.
‘While rising wages can tease the inflationary demon, what about other sectors of the economy, such as corporate profits? Not so, say a number of business leaders, adamant that companies are being unfairly singled out for embracing the profit motive.’
Daniel Ziffer also nailed it on last night’s ABC news/finance report, backing up the Australia Institute/OECD reports.
https://iview.abc.net.au/video/NU2301H160S00 (about 21.18)
Mr Lowe’s smirk might just be gaining on #30’s in its repulsive disingenuousness.
I agree Terrence Mills, I have asked that question many times, no one has an answer other than the fact that it is where banks make much of their profit.
If I take out a variable mortgage loan of $ 500K at say 1.9% I would be expecting that the bank is paying much less than that for that $500K. But when rates go up, even though the bank paid, say .07% they will still slug me for another .25%, which it has not cost them, because, for anyone taking out a new loan after the rate rise will the paying the higher rate and the bank may or may not have paid more for the funds for this new loan. Hence where the profits derive.
I believe in the US that housing loans are fixed for 30 years and are transferable between houses (some loans, not all of them). If they are fixed for 30 years the customer is never hit with increased interest, and the bank hasn’t lost anything.
Terry,
Don’t quote me, but I think it’s because the bank’s borrowing rate goes up, that is, the money they borrow now has a higher interest cost.
“…more harm is in the offing.”
And it will take several generations for this nonsense to end, because free market ideology has become text-book dogma. Economics students are being taught drivel.
@ Terence Mills: I asked myself that same question 50 years ago and am still waiting for a sensible answer. So, I presumed that banks were more interested in profit taking than all the media hype about ”assisting families”.
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The preference for floating point loans was allegedly the mechanism for banks to meet the moving cost of borrowing money. Yet those borrowings were for future loans at new higher cost, rather than past loans of already known cost that were generating profit at the interest rate agreed with the borrower.
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Now throw in the unilateral ability for banks to change interest rates at a whim and borrowers taking flooating point loans are trapped like an ant in a carnivorous pitcher plant.
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Profit from interest is maximised by banks deducting the calculated monthly interest from repayments before reducing the borrowed principal.
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Another banker trick is selling floating point ”advantages” of repayment flexibility with a slightly lower offered interest rate than fixed point loans, that protect the borrower from the unilateral interest rate movements providing known cost for the duration of the loan.
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Remember the 80s interest rate boom? We took out a fixed interest loan for three years at 14.5% in April with the rental property on a twelve month lease without any capacity to vary rent. By December the same year the floating point interest rate on a house loan had been unilaterally jacked up to 22% ….. while the the rent remained fixed based on the April calculations.
.
Now the Laberal government seems to have embraced neoliberal economics because the city cellar dwellers influencing political strategy by attempting to be popular with the greedy foreign owned multinational corporations rather than the Australian voters who returned them to government in the desperate hope of an egalitarian future.
Thanks Michael
It continues to irk me that the RBA Governor constantly tells us that the only tool he has to ‘dampen spending’ and tackle inflation is to increase interest rates – twelve times in just over a year. Inevitably the banks follow these increases which instantly impact those who are paying off a home loan or a tenant of a landlord paying off a loan on a rental property. It also slows borrowing and investment throughout the economy which ironically impacts the home building industry.
The main concern within the community, and as noted by NEC and Patricia, is that this sledge-hammer hits existing home loans and flows through to rentals. So, in fact we are slamming people where they are most vulnerable – in their ability to put a roof over their heads.
So why is it that the in the US, the home of capitalism, over eighty percent of home loans are on fixed interest rates for terms of up to thirty years – why would capitalists bother about punters paying off a home ?
Well, it goes back to the Great Depression when, as now, financial markets were in turmoil, interest rates were surging and mortgage defaults were throwing people out of their homes. The US government created the Home Owner’s Loan Corporation (HOLC) to buy mortgages in default and reinstate them at lower fixed interest rates for the term of the loan. The HOLC transformed the original short-term, variable rate mortgages to more-affordable 20-year fixed-rate mortgages, the first step to what eventually became the fully-amortizing, 30-year fixed-rate mortgage that dominates mortgage lending in the US today.
You may have heard of Freddie Mac and Fannie Mae in the context of the US home mortgage system : both Fannie Mae and Freddie Mac are nicknames derived from their full names: Fannie Mae from Federal National Mortgage Association (FNMA) and Freddie Mac from Federal Home Loan Mortgage Corporation (FMCC).
They are creations of the US government and are designed to funnel federal money through to trading banks at low rates of interest to ensure that the banks can offer affordable loans to home buyers at fixed interest rates over extended periods, normally up to thirty years.
In Australia we need to get away from this monthly nonsense spewing out of the RBA and creating stress in the economy and throwing people out of their homes. Perhaps for once we could take a lead from the US and establish a government backed home loan facility that actually gets people into homes by way of fixed rate loans over the term of the loan.
Incidentally, there are several states in the US including New Jersey, Oregon and California and maybe others, where rental increases on residential properties are limited to once a year and to a maximum of the CPI.
The RBA and home loan markets need drastic reform and only a Labor government would take this on : how about it Albo ?
https://www.fhfa.gov/about-fannie-mae-freddie-mac
Another part of the puzzle was in the paper the other day. Corporate profits leading the inflation surge. What a misnomer. The fossil fuel sector’s profits exploded thus increasing the GDP. So how far behind is the rest of the economy? So how do you make any sense of the RBA’s economic analysis?
You can’t because anything that doesn’t agree with the economic orthodoxy is not on their radar and dismissed as irrelevant.
The RBA does not operate in a vacuum, it works in co-ordination with govt policies.
The RBA takes its lead from the central bank of Central Banks, the Bank of International Settlements (BIS).
The BIS has an agenda that has nothing to do with people living happily ever after in their home.
In their BIS business eyes, your home is a source of wealth to be tapped via taxation, inc interest rate hike ‘theft’.
Once upon a time I believed the govt, Libs or Labor, would steer the economy to a soft landing if trouble arose.
Now I see through the game – politicians are addicted to power at any cost.
They don’t care about the housing/accommodation crisis – they created it.
They don’t care about the rapid rise in repayment costs to borrowers – they love it.
They both wrIte and pass tax legislation to advantage themselves.
What influence are Federal govt tax policies associated with lending for property having on inflation? Heaps.
What is the RBA doing to expose the role of the Federal govt in causing inflation? Nothing.
Will either the RBA or govt address the problems they created? Never.
3 Ps not properly assessed by RBA and other Central Banks. Profits Productivity & Prices. All the responsibility of management. But ordinary consumers made to pay double whammy! Banking / Corporate Rort.
The Acts and actions under both Monetary and Fiscal control systems are utterly broken and have demonstrably and repeatedly given rise to unconscionable and misdirected stimulus and subsequent gouging of ordinary consumers, and an unnecessary and ludicrous structural price spiral that leads toward the ultimate collapse of the otherwise efficient capital system – as we are now witnessing across the world. Marx warned about it. In Oz, over the past decade, and particularly mindlessly via the pandemic stimulus, the LNP recklessly ratcheted the stupidity. https://www.crikey.com.au/2023/06/09/inflation-business-profits-stimulus/
In Oz, and across the world of capitalist systems, the Corporations Code mandates that it is the ‘Directors’ duty to act in “the bests interests of the corporation”’, that is, the shareholders (and there are penalties for breach of director’s duties). That’s all very well, but there is a glaring imbalance in its failure to also mandate consumer’s interest. Some might say that market competition takes care of that. But it doesn’t, and the Consumer Codes are utterly inadequate in that regard, and there are many ways (such as jurisdiction-jumping and profit-shifting etc) that corporations can navigate around those provisions. Such behaviours not only give rise to inflation but also seriously and devastatingly skew ordinary expectations of the costs/benefits of supply and demand leading ultimately to stagnation and/or hoarding (as increasingly entrenched over the past 2 decades) and which is completely antithetical to healthy economies.
REDEFINING THE PURPOSE OF CORPORATIONS …. Sydney Univ Law School Lecture intro: “Since the early 1930, it has been considered that the main purpose for for-profit companies is profit maximisation for the shareholders. Directors’ duty to act in “the bests interests of the corporation” was interpreted as exactly that, maximise profits for your shareholders or run the risk of being in breach of your duties towards the corporation. In Australia, there were two Reports released that suggested that there is no need to reformulate directors’ duties to have regard to interests non-shareholder interest. It was argued that they could do so in any case. However, at their 2019 Annual Summit, the Australian Institute od Company Directors made it the number one priority for their “Agenda to move forward” to again look at what should really, legally, be understood under directors’ duty to act in the best interests of the corporation. There can be very little doubt that the AICD will be influenced by the remarkable development in the US with the announcement by the influential American Business Roundtable on 19 August 2019 that they now support an approach away from shareholder primacy, one they endorsed since 1997. The purpose of the corporation is now refocussed “to promote an economy that serves all Americans”. In this presentation development in Australia and in the US will be covered and what impact that may have on directors’ duty to act in the best interests of the corporation, both in Australia and in the US.” https://www.youtube.com/watch?v=6ixpWvCEyN0
Christine Legarde, president of the European Central Bank says corporate profits contributing to inflation, “ ……. have taken advantage to push costs through entirely without squeezing on margins, and for some of them to push prices higher than just the cost push,” Ms Legarde also says of the Central Banks (such as Oz RBA), “We don’t have as much or as good data on profit as we do on wages,” she said, adding, “If I had the choice, I would improve our data on profits on an aggregate basis as well as on a more granular basis.” Yet our RBA, via the yabbering Lowe, nor Treasury, nor the ABS has made anything more than an indecipherable squeak about it. https://www.euractiv.com/section/economy-jobs/news/ecb-lagarde-says-corporate-profits-contributed-to-inflation/
Existing systems and procedures in Australian government, administration, practice, tradition, finance seem to be archaic, ill-suited to modern social needs and needing quite serious investigation and modernisation. Home buyers, renters, students, the sick and old, all cannot get a feeling of fairness, security and real justice. It’s a fight for wages and conditions all over again since foul-souled misfit Jack Howard achieved his posing “fame” by following the orders of greedy and evil donors, sponsors, advisors, lobby sharks and fellow greedites. The wrong people are suffering and paying while some areas of corporate life get huge lucky windfall profits and guaranteed upward financial positioning and security, that being denied the majority of ordinary but deserving citizens who deserve Fairness. The rubbishy ignorance of non-existent teamwork built in to a three layered government system, means that people such as North Coast NSW flood victims are still shattered and strugglng after eighteen months of dithering. The covid days gave us concentrated teamwork in a national cabinet, which exposed the stupidity, deficiency, emptiness and negativity of Morrison and his hideous team of non performers. We just must do far better.
@ Phil Pryor. Well said, bringing it right home. Not only the floods, but also bushfires, and no doubt in the future, innumerable other matters federal, state and local. The entire bureaucratic regulatory framework tends to blue-sky idealism poorly designed to mainly cater for a static environment, economy and socio-cultural disposition in a closed system, with virtually no continuous risk overlay. Even for experts, its granularity is difficult and time consuming to navigate, often requiring ludicrous contortions to achieve compliance, and lawyers to make representations.
The granularity and rigidity of these systems appear to arise out of paranoid didacticism and gatekeeper conventions preferred by those wishing to maintain commercial dominance in a field. Accordingly the associated costs are prohibitive for many ordinary folk who need or are forced to comply with them.
Because of these strangulations, many such experts and their counterparts in the bureaucracy retire from the field, or have been removed, via the mode of ‘Chainsaw Dunlap’. They are often replaced by the inexperienced, so making the processes grind along inexorably.
Whilst they might rightly spout about sustainability and the like, significantly, most are not time, cost and citizen-customer friendly, therefore they are often self-defeating, being a drag on efficient attainment of service to the community and an end objective.
In times such as we have been in for the last 5-10 years, such matters are being realised, and emerging to bite us all hard.
Clakka has been making a big effort to illuminate aspects of topics not well enough done, especially in our defective and more often despicable mainstream media. Australia has never been well enough governed, and only recently, has some light appeared (to me) in the across the board efforts of our national cabinet. This must be written up, pursued, encouraged, for more people have been shown a path to better diplomacy, compromise, backed up evidence based behaviour, pathways. But, Morrisonisms, Trumpisms, neoliberalisms, corporatisms, selffixationisms, all this and more RUIN civilised discourse and progress, especially if filtered to the general public through maggoty media misfits.., and, Terrence, Fannie May and Freddie Mac lost a combined 3.1 bill USA $ between April and June, 2008.These losses came mainly from “liar loans”. The fee takers kept their loot from having sold them, but American Home Mortgage, IndyMac and Bear Stearns all went down and out.
@ NEC, where you note, “Profit from interest is maximised by banks deducting the calculated monthly interest from repayments before reducing the borrowed principal.” Unless they’ve changed the law lately, the legal obligations to repay debt are in two tiers, firstly, the primary obligation is to repay the principal, and the secondary obligation is to pay the the accumulated interest. And I do not believe it is legal for banks to obviate that law by ‘contracting’ around it. Should the bank seek via litigation to recover a debt, it has to take two seperate proceedings, first to prove and obtain orders to recover the remaining debt on principal. Second, and later, to prove and obtain orders to recover any accumulated interest on that principal first proven and ordered. And it is not so straightforward. The fundamental law requires the principal to be repaid in (any) increment with stipulated regularity. So, if one is struggling, pay any increment one can afford REGULARLY (as stipulated), documenting that it is to be paid ONLY against the principal (witnessed via a JP is good). Don’t relent and don’t move out of or relinquish one’s house.
Sorry (not really) to bang on about it, but here’s some more:
To facilitate the making of big loans and balancing their treasury risks, the banks can ‘borrow’ from whoever they like. Typically there are two main sources; Central Banks (cash rate) and between banks, bank bill trading (eg. In Oz BBSR and UK LIBOR). Again, typically the banks seek to maintain an approx min 2.5% margin between the interest rate at which they borrow and the rate at which they lend.
The graph of the recent history of the borrowing / lending gap in the following article gives pause for thought – with a small amount of thinking, one can see that they are really far from consistent with their margins. And of course, we should be aware that there has been pressure on them regarding their gaping inconsistency in passing on fluctuation gains to consumer deposits.
https://mozo.com.au/interest-rates/articles/what-is-the-cash-rate-and-how-does-it-affect-you
We would remember the crash of ’87, when together, the banks and investors in a buy/sell frenzy majorly over-baked the stock market completely ignoring the trading fundamentals causing an inevitable correction-crash in Oct ’87. Ordinary mum-n-dad mortgagers paid the price with mortgage interest rates skyrocketing to the mid-high teens.
Then again, the 2008 GFC was brought about by banking corruption – the US bank’s no-doc / low-doc loans to folk who could not ultimately make the payments. Despite this the US banks traded those loan papers internationally, spreading the failure contagion around the globe. Who paid – ordinary mums-n-dads via their taxpayer money being used by governments to bail out the banks. In Oz it was a guarantee to the banks.
Come 2012 to 2019, the banks were at it again, with a more stealthy scheme to game the system:
The LIBOR banking scandal. $9 billion in fines. incl Deutsche Bank, Barclays, Citigroup, JP Morgan Chase, & Royal Bank of Scotland
https://www.investopedia.com/terms/l/libor-scandal.asp
Could the Oz BBSR be manipulated like the LIBOR?
https://clmr.unsw.edu.au/article//the-bank-bill-swap-rate%3A-could-the-libor-scandal-happen-in-australia%3F
The Oz BBSR (Bank Bill Swap Rate) scandal. A pittance of $125m in fines. 17 Banks incl. the Big 4.
https://www.abc.net.au/news/2017-11-10/anz-nab-agree-to-$100m-settlement-of-swap-rate-fixing-case/9138796
But in Oz it was quickly and quietly swept under the carpet with no demonstrable compensatory charges for the bank’s fleecing of the public.
https://www.afr.com/companies/financial-services/asic-makes-modest-return-on-bbsw-rigging-cases-against-nab-cba-westpac-anz-20190214-h1b8u6
Who in their right mind could ever trust the system or the banks in the woefully inadequately regulated form of greed-based suicide-capitalism. In the face of such manufactured tragedies, it is more than an irony that properly regulated against greed and corruption and lunatic growth paradigms, capitalism is by far the most efficient system for sustainably spreading and maintaining wellbeing for all. And of course, IMHO, economists suck for not calling it out.
Next week could be interesting in terms of what happens to the concept of shelter in Oz.
What will happen in the economy in broad terms? And what blame-shifting will occur between the RBA (ABN 50 008 559 486) and Treasury (ABN: 92 802 414 793)? The clash of Titans, 2 corporations pretending to care about families and the economy, pretending to be independent, and both failing in their pretences.
Will the RBA lift, drop or stay interest rates?
RBA lifts rates: landlords lift rents, recent buyers of a principal home become more stressed, not good.
RBA drops rates: a green light to investors to double down on buying, ie. more inflation?
RBA stays rates that’s also possibly a green light, judged by ‘experts’ as a rate top, so, why not splurge?
Thinking about the RBA and its game with Treasury.
The game seems to be how to monetize the need of shelter so the maximum amount of taxes can be extracted.
In the last couple of weeks AirBnB Aus came out and defended the impact of its holiday business model which, thanks to very generous tax regs that favor investors, results in fewer rentals in the long-term residential market pool. AirBnB’s solution was that all occupied homes could be treated as a business, ie. owners rent out spare rooms to strangers. It sounded as if AirBnB is already and waiting with a franchise planned to do just that. What could possibly go wrong? Another analyst recommended that CBD buildings be used for shelter.
I always wondered about how quickly CBDs were built up and now I’m wondering now if this was an original intent.
Long story short, the days of the family home are just about dead. Why bother building much new stock when existing structures can be used. Australia is well on its way to serfdom for the masses. Just a few tax rule tweaks and we’ll be there.
One thing more, and it’s a biggie. The most recent promise from Labor in regards to unaffordable housing and suggestion of a rental price cap relates to a comment made by either Albo or Chalmers in the last week. One of those 2 populists said rental price caps for investors did not mean that rents would not increase but they ‘will be allowed to increase at a rate that was slightly higher than inflation’. Does that sound like a gold-plated guarantee to the most protected species in the economic landscape or what? Imagine a PM or Treasurer saying Coles or Woolies could increase food prices higher than inflation and the government has your back, or electricity prices would never again increase at a level below the average rate of inflation.
Labor has no intention of reigning in inflation and they have no right to govern if that’s the way they want to play the game. The can join the LNP on the sidelines until they nut out better economic strategies as far as I’m concerned.
But then again, who knows? Perhaps Labor might next have renter’s backs and mandate rent prices drops at greater than inflation if interest rates decline. That’d be first and proof of the beginning of the end of self-interest driving both Labor and Libs. Time will tell.