Why the RBA refuses to cut rates

Sam Hawley: Remember when we were being told to expect a rate cut, or maybe even three, this year? Well, forget it. The RBA has kept rates on hold again after its Tuesday meeting and it seems there’s next to no chance it will be moving them down before the year’s out. Not only that, we’re teetering on the edge of a recession. So what on earth is going on? Today, Chief Business Correspondent, Ian Verrender. I’m Sam Hawley on Gadigal Land in Sydney. This is ABC News Daily.

News report: Interest rates holding at a 12-year high of 4.35%, where they’ve been since November last year, and certainly no reprieve for home borrowers.

Michele Bullock, RBA Governor: We’re not ruling anything in or anything out at the moment. I wouldn’t say that the case for a rate rise is increasing. What I would say is that there’s been a few things that have made the board alert. We need a lot to go our way if we’re going to bring inflation back down to the 2% target range.

Sam Hawley: Ian, I know we’ve spoken before about how you’re not really a fan of economic predictions because I guess they can be right one day and wrong the next. But when it comes to interest rates, you know, people really pay attention, don’t they, to these predictions because they matter a lot?

Ian Verrender: Oh, they matter an enormous amount, really. I mean, you know, there’s a lot of people out there doing it really tough at the moment and any hope, I guess, that there’s going to be some kind of relief when it comes to interest rates is, you know, gratefully accepted. But, you know, as you just said, the predictions change pretty much from one day to the next. And this year, I mean, we’ve seen some really wild changes in the predictions, both in America, across Europe and here as well. So, you know, we did have predictions for rate cuts really, I think, round about May. They’ve been delayed till September and then November and December. But look, it’s quite possible that we’re not going to see any change in interest rates at all this year. And the latest predictions from a lot of people are that we might not see any change at all until, you know, sometime in the middle of next year.

Sam Hawley: Oh, my gosh. And there are some economists, including Judo Bank Chief Economic Advisor, Warren Hogan, who’s actually saying he thinks the RBA will actually lift rates this year.

Ian Verrender: Yeah, he’s been very consistent in that call. Look, I disagree. He puts forth some reasonable arguments as to why that should be the case, why they should raise interest rates because he argues that we really need to kill off the inflation problem that we’ve got.I’m not sure that raising rates any further would do that. And, I mean, you know, you’ve got a reserve bank sitting there at the moment thinking, well, the economy is barely managing to keep its head above water. Do you really want to tip it into recession? I don’t think they do.

Sam Hawley: We do get a bit worried about Warren Hogan, though, don’t we, because he’s been right before.

Ian Verrender: Well you know, he has been right before and he was labelled last year as the most consistently correct economist when it comes to predictions. You know, and as I said, look, he puts forth some legitimate arguments as to why he thinks rates should be raised. I don’t agree with it and I don’t think the reserve bank would agree with it either.

Sam Hawley: Of course, rates have stayed on hold this time. But given that pain, Ian, that people are feeling, and a lot of people and businesses, why are they on hold? Why can’t they just drop them a bit?

Ian Verrender: Well, I guess they can’t drop them for a number of reasons. And the primary one would be it’s just the optics of it, right? If you drop them right now when we have inflation looking like it is still a problem, that sends a message around the world that we’re not serious about our inflation problem. And that would result in market shifts and money leaving Australia, which would then create a bigger problem. So there’s a reputational problem that’s attached to any decision that central banks, and that includes the Reserve Bank of Australia, any decision they make reverberates around the world.

Sam Hawley: Well, Ian, let’s have a look then at this inflation problem that we’ve got, which is very sticky, as they say. So if you read the headlines, we are apparently on the brink of a recession, but what does that actually mean? Because it does sound rather scary.

Ian Verrender: Well, if you look at the economic growth figures that came through just a fortnight ago, our economic growth was 0.1% for the quarter, and essentially what that’s telling you is that we’re only barely in growth territory. And the primary reason we’re in growth territory is because we’ve had such an incredible lift in the size of the population because we’re bringing in a lot of people from outside at the moment. And in fact, the economy isn’t growing anywhere near as quickly as the population is growing. So you could argue that if you strip out the effects of immigration, we’re actually going backwards at the moment. So the economy is just barely keeping its head above water when it comes to growth, and that would be another reason why the Reserve Bank would be really hesitant to try and raise rates in this environment. So they’ve got all these competing elements out there. We’ve got economic growth, which is barely growing. We’ve got inflation, which has ticked higher, slightly higher, just in the past, the most recent reading, and we’ve also got employment numbers that have been much stronger than expected. So it’s like they’re caught between a rock and a hard place. They want to make sure that people don’t lose their jobs, so they don’t want to raise rates, but we’ve got very strong employment numbers at the moment. They want to get inflation down, so that would be a factor with why they should raise rates, because it’s still a problem. But we’ve got the economy barely growing. So what do you do in that position? Well, you sit on your hands, really, and you do nothing, and you wait to see which way everything is going to move before you make a decision.

Sam Hawley: Mm. I noticed, Ian, that some people are sort of pointing back to the 1990s and saying there is some similarity between what’s happening now and what happened then. Of course, that’s when we had the recession that Paul Keating, who was the Treasurer, of course, at the time, said we had to have.

Paul Keating, fmr Treasurer: This is a recession that Australia had to have, that the spending we had in the two years up to now was unsustainable, that we couldn’t go on spending and consuming at the rate we were, carrying the imports we were and the debt we were, and, of course, the erosion of our gains on inflation.

Sam Hawley: Is there similarities?

Ian Verrender: There’s always similarities, but there’s always differences.I guess one of the key differences this time is that we’ve raised interest rates at a very, very rapid pace, not to the same height that we did back in the 90s when rates hit 17.5%, but we’ve come off an extraordinarily low base at 0.1% and we’ve gone to, what, 4.35%. So, you know, it’s been a very rapid increase, but what’s happened this time is that we haven’t seen the uptick in unemployment, and that was one of the key things that happened during that recession of the 1990s. Unemployment really, really took off and it became a problem for a decade. That hasn’t happened this time, so there are big differences. No one can really quite explain exactly why we haven’t seen a big lift in unemployment, but, you know, there are some suggestions, Warren Hogan being one of the main protagonists, saying we’ve got a labour shortage problem in Australia, which is why people haven’t laid workers off, but still, generally speaking, when you see rate hikes of the speed and the severity which we put them through, you would normally expect unemployment to rise and rise quite sharply. It just hasn’t happened this time.

Sam Hawley: Yeah, wow. Okay, and in the 1990s, of course, as you said, it was a long-lasting impact because so many people actually lost their jobs, but I just still don’t understand, if we’re teetering on a recession, Ian, why… I mean, in the 90s, they then slashed rates, right? So why still can’t they just bring the rates down and stop us actually falling into a recession? It’s very hard to understand it.

Ian Verrender: Well, because inflation is taking longer to come off the boil than expected, and so, you know, the Reserve Bank has a target range and each central bank has a target to where they want to keep inflation. Ours is between, you know, 2% and 3%. Now, at the moment, it’s sitting really quite substantially above that at around about 3.6%, and bear in mind, it went up from 3.5% in the most recent reading. So it’s heading in the wrong direction and it’s still too high for their liking.

Sam Hawley: So in the end, is it that there are too many people still in Australia and businesses that are doing really quite well at the moment while there’s another group that’s really struggling to get by? It’s that contradiction, isn’t it, that’s going on? Is that the main problem?

Ian Verrender: Well, that’s the problem with just using interest rates as the only tool to contain inflation. You know, there are other means by which you can do it, but they’re incredibly unpopular. So, you know, interest rates really only affect people with mortgages or people with debt, essentially. So businesses with debt, households with mortgages, and the bigger your mortgage and the greater proportion that that soaks up of your income, the harder it hits you. But, I mean, you know, so if you don’t have a mortgage, you own your own house and you’re doing well, you know, you’re doing very well at the moment. Yeah. And if you’ve got a job and you’ve got a good income, you know, it’s not affecting you at all. So what are the other things that you could possibly do? Well, if you’re the government, you could impose perhaps some kind of tax or levy on people who are in that happy situation so that everybody contributes to the inflation-fighting fund, is it more?But we don’t do that because any measure along those lines would immediately be met with a government being kicked out of power. So, unfortunately, we’re in this situation where we heap all of the pain onto one particular group of people, and that’s people with debt, whether it be small businesses or households with big mortgages.

Sam Hawley: I guess, Ian, as a nation, we do put a lot of trust in the RBA to get these decisions on interest rates right, don’t we? I know they seem to be between a rock and a hard place right now, but we really trust that this board is going to make the right decisions.

Ian Verrender: Yeah, that’s correct, absolutely correct. And, you know, the Reserve Bank has gone through a difficult time in the past couple of years. We’ve seen an overhaul of the bank’s processes and the way it makes decisions. We’ve seen a change in the leadership of the bank, and primarily because it was deemed that they made the wrong calls, that essentially they predicted that interest rates wouldn’t be rising for several years, and the pressure became so great to do so that it was a very embarrassing situation where they had to raise interest rates. And then it was deemed that they raised rates too late. So, yeah, I mean, but, you know, they’re human beings. Nobody can really accurately predict the future, and they’re never going to get it right all the time. I mean, the Reserve Bank of Australia over the past 30 years has been a really very good central bank when it comes to making interest rate decisions and what’s in the best interest of the economy. Were they negligent in getting it wrong the last time? Probably tried a little too hard to pull the economy out of that COVID-led, well, it wasn’t just a recession, was it? It was more like a depression. They made a wrong call, and they paid the price for that. But, yeah, you’re absolutely right. We do rely on them, and rely on them probably a little too heavily. I do think that there is a case for government intervention to try and help the central bank to work in unison, more in unison with the central bank than simply leaving it pretty much in the, you know, up to interest rates alone.

Sam Hawley: All right. Well, the RBA board will meet again in two months’ time. I don’t know. Do you want to predict what they’ll do then?

Ian Verrender: Look, I think we’re going to be on hold for quite some time because, you know, as we’ve said, what do you do in this kind of situation? You want to bring inflation down. You want to be telling the entire world that you’re serious about bringing inflation down, but you don’t want to tip the economy into recession. You don’t want to suddenly find that incredible jobs performance that we’ve had, the employment performance that the economy has put up in the past couple of years. You don’t want that suddenly to turn negative and all these people will be thrown out of work, and then we do go into a really deep recession. So I think they’ll be on hold for this year at least.

Sam Hawley: Ian Verrender is the ABC’s chief business correspondent. This episode was produced by Bridget Fitzgerald and Jess O’Callaghan, audio production by Sam Dunn. Our supervising producer is David Coady. I’m Sam Hawley. To get in touch with the team, please email us on [email protected]. Thanks for listening.