In the global competition to lower interest rates, the "perverse" RBA is not participating.

 

Even in the era of the internet, it takes longer for many international trends—including those related to fashion, film, and economics—to reach Australia.

That was the case with the most recent inflationary wave. Inflation in Australia peaked in December 2022, a few months behind that of North America and Europe, making travel slower. Additionally, it abated more slowly.

But overall, when time lags are taken into account, Australian inflation has progressed similarly to that of other OECD nations.

After dropping to 2.8% year over year in the most recent measurement, inflation is now nearly back to the Reserve Bank of Australia's 2.5% objective.

Like the rest of the world, Australia saw a severe but evidently temporary spike in inflation as a result of the pandemic: excess profit-taking, pent-up consumer demand, and supply shortages drove up prices.

However, as soon as supply conditions stabilized, inflation began to decline as quickly as it had increased.

inflation driven by supply

Post-Covid inflation was primarily supply side, in contrast to traditional narratives about wage-price spirals and surplus purchasing power.

Furthermore, its most common distributional form has been record profits rather than excessive compensation.

Inflation swiftly returned to normal, and supply chains and energy costs stabilized. What comes next?

Regretfully, Australia is currently trailing behind another worldwide trend: bringing interest rates back to reality.

The RBA decided this week to keep its policy rate frozen at 4.35 percent for the next year, despite the sharp drop in inflation.

Hopes dashed

By announcing that it does not anticipate "underlying" inflation, as measured by its preferred "trimmed mean" metric, to "sustainably" attain its 2.5% objective until 2026, the bank dashed hopes for pre-Christmas rate easing.

Few experts anticipate a rate cut until February at the latest; some now speculate that rates may not be lowered at all.

Even as other industrialized nations return to stimulus monetary policy, the RBA's unyielding commitment to high rates could hinder Australia's economic recovery.

Rates have already been lowered by almost all other major central banks, with some having done so three or four times before.

Cut slowly

The Swiss National Bank was the first to cut in March, as the table illustrates. Since then, it has made two further cuts, bringing the rate down to 1%, which is less than 25% of the RBA's target.

The Bank of Canada has reduced by 1.25 percent overall after making four cuts, the most recent of which was a supersized 0.5%.

The Reserve Bank of New Zealand has made two cuts, and the European Central Bank has made three.

Although it was late to the party, the US Federal Reserve made a huge 0.5% decrease in September.

Almost all market watchers agree that the Fed will make another cut this week, possibly by an additional 0.5%. This week, the Bank of England is also anticipated to make another cut.

Relief is required.

Interest rate changes take time to turn a national economy, which is like a giant ship. Economists estimate that the entire impact of rate adjustments takes 18 to 24 months to manifest.

This indicates that the majority of the RBA's 13 prior rate increases, which began in May 2022, have not yet been completely assimilated.

Without prompt action from the RBA, the already dire economic conditions—annualized GDP growth of less than 1% for the last three quarters—will worsen.

Additionally, other nations' experiences demonstrate that if central banks wait too long to begin reducing, they will overshoot their goal and decrease inflation below their own standards.

Although it may seem strange to be concerned about too low inflation, central banks are expected to be equally concerned about below-target inflation as they are about above-target inflation, according to their own theories.

Significant weakness

Excessively low inflation can lock in weak consumer and company spending for years and is a sign of severe weakness in confidence, spending power, and job growth.

Both Canada (1.6%) and Europe (1.7%) have already seen their inflation rates drop below the official 2% targets. The Fed's favored PCE measure of inflation was only 2.1% in September and is expected to continue to decline in the upcoming months, so it will soon do the same in America.

The clear indication of excruciating economic stagnation that verges on recession is more worrisome than below-target inflation.

Employees pay a price.

Workers are suffering from increased unemployment and increased insecurity as a result of the one-sided anti-inflation program. This has incentivized other central banks to make rapid cuts. However, the RBA does not seem to hear these worries.

Despite copious evidence of slowing prices and a floundering labor market, the RBA's irrational devotion to high rates reveals a limited, ideological viewpoint that is becoming more and more at odds with the rest of the globe.

The bank appears to enjoy portraying itself as the stern protector of price stability.

However, its exclusive concentration on a nebulous indicator of "underlying" inflation is pushing Australia's economy into a worsening slump and goes against its statutory mission to promote more than just price stability.

If the RBA does not make a swift change, we will fall far behind the rest of the world in returning to normal growth and rates.