The RBA chose to sit on its hands in 2024. Here’s why

At its first meeting of 2024, the Reserve Bank of Australia board held the official cash rate steady at 4.35 per cent.

Following its final meeting of the year, almost exactly the same board held the cash rate at that very same point – 4.35 per cent.

Illustration by Simon Letch

If you were an unkind judge, you might wonder what the hell the country’s most important financial institution has been doing for the past year.

As the RBA itself and many of its analysts note, the bank wields just one tool to manage inflation. And over a 12-month period that tool – the cash rate – remained sheathed.

Over that same period, the United States Federal Reserve sliced its key lending rate a full percentage point (though it remains higher than Australia’s rate).

The central banks of Canada, England, New Zealand (now in a deep recession), Mexico, Sweden and even Switzerland (where the cash rate is just 0.5 per cent) all cut their official interest rates over the past year.

In terms of doing “stuff”, these other central banks certainly put the RBA in the shade. Not that the Reserve was Robinson Crusoe – Norway’s central bank kept its cash rate at 4.5 per cent all year, as did India’s (at 6.5 per cent).

We shouldn’t be surprised by the RBA’s seeming inaction – it is the bank’s default setting.

Since 2010, for instance, the board has met on 152 occasions. Rates remained steady after 114 of them, including its record run of almost three years between August 2016 and mid-2019 (when it clearly should have moved, but that’s another story).

In the current cycle, the bank last moved rates back in November last year. While not moving is normal, it’s the reasons for inaction that are the most important.

Inflation at the November 2023 meeting, when it took the cash rate to 4.35 per cent, was 5.4 per cent and underlying inflation was 5.1 per cent.

The most recent figures from the Australian Bureau of Statistics have inflation at 2.8 per cent, in part due to government energy subsidies, while underlying inflation is at 3.5 per cent. In the 12 months to the end of September, economic growth flat lined to just 0.8 per cent. If it wasn’t for government spending and population growth, the country would be in recession.

There were some experts who reckoned the country needed even higher interest rates, which surely would have crippled the economy.

I can hear those of you with a mortgage arguing that the fact inflation is falling, and the economy is on life support should be enough for the bank to be taking the brake off monetary policy.

Over the same period, however, unemployment has remained steady at 3.9 per cent. That the country has created almost 400,000 jobs over the past year, of which two-thirds have been full time, points to a pretty-tight jobs market.

Sightings of a price-wage spiral have gone the way of the Tasmanian tiger.Credit: Dominic Lorrimer

The jobs market strength is an issue for the RBA, which had long-held concerns of a price-wage spiral as workers sought to keep up with high inflation by demanding ever-increasing pay rises.

The term “price-wage spiral” last appeared in the minutes of the Reserve’s October 2023 meeting, just ahead of that most recent rate increase. But much like Tasmanian tigers, reports of price-wage spirals out in the wild are no longer given any credence.

Instead, wage growth has eased (from 4 per cent to 3.5 per cent), the number of insolvencies is climbing, and house prices are easing everywhere.

Ah, house prices. The Australian parlour game that continues to enrich older people at the expense of their children, grandchildren and great-grandchildren.

The RBA ended the year releasing a series of research papers including one about the impact of interest rate movements on the level of home ownership in this country.

The authors, two of whom work for the RBA, examined whether the fall in the bank’s official cash rate since 1995 (when it was 7.5 per cent) to 2019 (when it was cut from 1.5 per cent to 0.75 per cent), had a measurable impact on the ability of young Australians to buy a home.

They came back with an emphatic yes, finding that at least a quarter of the drop in ownership – among those under 40, it’s fallen from around 60 per cent to about 45 per cent – could be tied to low interest rates.

“As rates decline, house prices rise, which tightens the down-payment constraint on new mortgages and raises transaction costs of buying housing. Home ownership falls,” they wrote.

Australia’s great parlour game - house prices - makes life more difficult for the Reserve Bank.Credit: Peter Rae

We’ve found other ways to price the under-40s out of a home. State government stamp duties, the researchers found, are just as culpable as low rates. Then there’s supply, what’s going on in the rental market (where investors are chasing capital gains thanks, in part, to federal government tax policy) and a host of other reasons.

The fact interest rates have fallen over the past 30 years also points to the success of central banks in bringing inflation under control. Low, stable inflation is an absolute positive – the RBA’s north star.

But the success on inflation has clearly had a negative impact on housing affordability.

If and when the RBA does get around to cutting interest rates next year, apart from the relief it will provide to millions of people with a mortgage, it will bring sighs of despair among the hundreds of thousands of Australians currently priced out of their own home.

Put house prices into the mix with everything else that is touched by any change in interest rate settings, and you can understand why the bank can sit on its hands for long stretches.

How much longer it can wait will be one of the biggest questions of 2025.

Shane Wright is a senior economics correspondent for The Age and The Sydney Morning Herald.