RBA holds rates: Why Australia needs more than one economic lever

The RBA’s interest rate decisions operate like a hot-air balloon with just one lever, leaving mortgage holders at the mercy of economic winds.

Setting the nation’s interest rates is a bit like piloting a hot-air balloon – you have one lever that goes up and down, but whether or not it steers you in the right direction is largely up to the wind.

A balloonist who wants to avoid a crash must carefully monitor weather charts, watch the data, and hope their work results in the people in the basket having a decent ride and a soft landing.

Likewise, the Reserve Bank’s Monetary Policy Board – the group charged with setting the cash rate- really only has one lever. They can send it up, they can take it down or they can leave it alone.

The RBA has no control over global economic conditions, international markets or pandemics, so it can really only do the maths, make a move and hope it works.

RBA Governor Michele Bullock gives a statement after the RBA's Monetary Policy Decision to keep interest rates on hold in December. Picture: Christian Gilles

As a method of fighting inflation, it’s a blunt object. It can’t target house prices, or wages or any other inflationary sources – and it doesn’t take into account exactly who’s in the basket.

That is anyone with a mortgage – or who rents their home from someone with a mortgage – or who’s employed by the business of someone with a mortgage, or whose business relies on support from someone with a mortgage.

Who’s not in the basket? Those who own properties outright or have savings in accounts that earn interest – the same people who are most able to be spending big on holidays, food and the latest Tesla.

Arguably, those most likely to make a healthy a contribution to inflation during a cost of living crisis, will only feel positive impacts from higher rates so won’t slow their spending.

It’s past time for Australia to look to how other economies manage a more nuanced approach.

More levers are needed – whether that’s more restrictive lending or better measures of inflation is up for debate.

In the meantime, Tuesday’s decision to hold the cash rate has left those of us in the basket hovering uncertainly, waiting to see where the wind blows.