The Reserve Bank of Australia (RBA) has been at the center of debate, with politicians and the public questioning its policies on interest rates. There’s increasing frustration that the RBA has not reduced interest rates, despite community pressure. Let’s take a look at what’s really happening and why the RBA is maintaining its current course.
Political Criticism of the RBA
Treasurer Jim Chalmers has openly blamed rising global uncertainty and interest rates for “smashing the economy.” Former Treasurer Wayne Swan also voiced his frustration, accusing the RBA of following outdated economic principles instead of making sensible decisions. He argues that their policies are hurting families, causing less spending, and pulling the economy backward.
For Australians with mortgages or paying rent, the last 13 consecutive interest rate hikes have been hard to bear. The first increase happened in May 2022, and there has been no relief since. This has had a ripple effect on households, leaving many feeling the squeeze.
The RBA’s Decision on Interest Rates
In its September meeting, the RBA Board chose to keep the official cash rate at 4.35%. The main reason for this decision is the ongoing problem of high inflation, which has been a challenge for the past 11 quarters. In the year leading up to June 2024, the consumer price index (CPI) rose by 3.9%, staying above the RBA’s target range of 2-3%.
Despite this high inflation, the RBA has been clear that it’s too early to think about lowering interest rates. RBA Governor Michele Bullock has warned that rate cuts are unlikely anytime soon.
Economic Data Paints a Gloomy Picture
According to the Australian Bureau of Statistics (ABS), the June 2024 National Accounts show that the economy is struggling. Per capita GDP declined for the sixth consecutive quarter, falling by 0.4% to -1.5%. This marked the longest period of continuous economic weakness on record.
Household spending, which is a major part of the economy, has also slowed down. In the June quarter, spending decreased by 0.2%, the weakest since the COVID Delta-variant lockdown in September 2021.
Less Spending on Discretionary Items
One of the biggest areas hit by the downturn is discretionary spending—money people spend on non-essential items like travel, events, and dining out. This type of spending fell by 1.1%, with the hardest-hit sectors being hotels, cafes, and restaurants, which saw a 1.5% decrease. Even spending on groceries dropped slightly by 0.1%, showing how households are cutting back to save money.
Household Savings Hit a 17-Year Low
Adding to the financial stress, household savings are at their lowest level since 2006. Households are now saving just 0.9% of their income. When household spending grows faster than income, it becomes harder for people to save, making it tougher to build financial security.
Where is Economic Growth Coming From?
While household spending is down, the Australian economy still managed to grow by 0.2% in the June quarter. However, this growth was mainly driven by government spending, not consumer demand. Government consumption added 0.3 percentage points to GDP growth, with social assistance programs and state government expenditures boosting the economy.
The RBA’s Difficult Balancing Act
The RBA is trying to balance two major goals: bringing inflation back to its target range while protecting the job market gains made in recent years. The RBA expects to reach its inflation target of 2-3% by the end of 2025.
Over the past 18 months, most items in the consumer price index (CPI) basket have been rising faster than normal. However, prices for goods have started to come down as supply issues caused by the COVID-19 pandemic and the war in Ukraine have begun to ease. But two problem areas remain: housing and services.
The Cost of Housing and Services
Housing costs are rising because of increased construction costs and higher rent. Meanwhile, inflation for services remains high at 5.3% in the June quarter, even though spending on things like travel and dining out is down. The high cost of services is driven by several factors: wage increases, lower productivity, and rising business expenses such as electricity, insurance, logistics, and rent.
Who’s Hurting the Most?
Inflation tends to hit lower-income households the hardest, as they spend more of their income on necessities like food, utilities, and rent. In contrast, wealthier households tend to spend more on housing and non-essential items. As a result, younger and lower-income households are feeling the brunt of rising costs.
Conclusion
The RBA’s decision to keep interest rates high, despite political pressure and public dissatisfaction, reflects the complex challenge it faces. The RBA is trying to curb inflation while preventing the economy from falling into deeper trouble. While the pain is real for many Australians, especially those with lower incomes, the RBA remains focused on its long-term goal of stabilizing prices by 2025. Until then, the economic strain is likely to continue.
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By Angela Abejo @ Pitt Martin Tax
