As Trump’s big, beautiful debt gets ever bigger, let’s give thanks for the RBA

It remains one of the most memorable – for all the wrong reasons – images of this century. President George Bush, on the deck of the USS Abraham Lincoln, in May 2003, delivering a speech on the war in Iraq with a huge banner behind him declaring “mission accomplished”.

The war would continue well into the next decade, amplifying terrorism around the globe while destabilising the Middle East. We see that ongoing destabilisation even now.

Illustration by Simon LetchCredit:

There’s been no thought of the Reserve Bank producing a “mission accomplished” banner to put behind governor Michele Bullock when she stands up next week to confirm inflation in Australia is continuing to fall, the jobs market remains extraordinarily resilient and the economy is expanding.

Most economists and financial markets expect Bullock to reveal on Tuesday a further quarter percentage point cut in official interest rates after the bank’s monetary policy committee meeting. It would take the cash rate down to 3.6 per cent, be the third rate cut this year and be the first time the bank has delivered back-to-back rate cuts since March 2020, when the RBA sliced the cash rate twice within a fortnight.

Even if Bullock and the bank hold fire at their July meeting, markets and economists are united in believing a rate cut in August, and another towards November, are on the cards. Such an easing of official interest rates without the economy having tanked or unemployment soaring (or a combination of both) would be in stark contrast to the Reserve Bank’s long history.

The fight against inflation in the late 1980s led to the nation’s deepest postwar recession. Unemployment had fallen to 5.8 per cent in late 1989, just as the bank lifted the cash rate to 18 per cent. It didn’t get back to 5.8 per cent until 2003.

The bank had a good global financial crisis in terms of avoiding a recession with only a modest increase in the jobless rate, though its interest rate settings contributed to an extremely strong Australian dollar, which hollowed out non-mining parts of the economy.

And the less said of the pre- and post-COVID period – interest rates too high before the pandemic, kept too low for too long after the worst of it – the better.

Bullock and the bank have copped plenty of criticism from both sides of the monetary policy debate over the past 14 months or so. Hawks reckoned the bank should have driven rates up much higher (in a move that certainly would have delivered a recession), while doves – including senior members of the government – moaned that the bank’s rate settings were smashing the economy.

While economic growth has been poor, and negative in per capita terms, the fact that unemployment has remained steady, with more than 1.1 million jobs added to the country since the bank started lifting rates, is remarkable.

The bank has two jobs: keep inflation between 2 and 3 per cent, and have as many people employed as possible. On that front, and amid the missteps taken during COVID, the invasion of Ukraine, the Middle East war and the uncertainty that is Donald Trump’s presidency, the RBA can declare “mission accomplished”.

For years, the bank spoke of the narrow path facing the country as it sought to bring inflation down while protecting the jobs market. Well, the narrow path – while it may not have opened into a four-lane freeway – is certainly broader and safer.

This all stands in contrast to what is playing out in the United States, where Trump is openly at war with the head of the Federal Reserve, Jerome Powell. Trump took his complaint about the Fed – which has held interest rates steady at 4.25-4.5 per cent this year largely due to concerns that the president’s tariff policy will drive up inflation – to a new low this week.

He published a list of 44 nations and their official interest rates, with America ranked 35th highest. It also included a message (written with a Sharpie pen) directly to Powell, whom Trump appointed in 2018.

White House press secretary Karoline Leavitt holds up the note from Donald Trump to Jerome Powell.Credit: AP

“Jerome – you are, as usual, ‘Too Late’. You have cost the USA a fortune and continue to do so. You should lower the rate – by a lot!” Trump declared.

Even by Trump standards, his collection of nations was unusual. US interest rates were compared with those in Cuba, Bolivia, Algeria, the Democratic Republic of the Congo, Libya, Cabo Verde and Papua New Guinea.

The list was clearly compiled using AI, similar to how the Trump administration compiled its “liberation day” tariffs that included the poor penguins and seals of Heard and McDonald Islands.

That’s how you end up with Cabo Verde – economy $US2.8 billion and a cash rate of 2.5 per cent – on a list, but not nations such as Iceland (economy $US33.5 billion and cash rate of 7.5 per cent) or Indonesia (economy $US1.4 trillion and cash rate of 5.5 per cent).

Of course, there was no mention as to why interest rates in the US are higher at present.

A second sentence from Trump caught the eyes of those who worry about the state of America’s finances: “Hundreds of billions of dollars being lost! No inflation.”

The hundreds of billions of dollars he referenced are not “lost”. That’s the cost of borrowing money. And the biggest borrower in the US right now is the Trump administration.

It ran a $US316 billion ($480 billion) budget deficit in May alone. It was slightly down on May last year, but that was only due to the natural disasters in 2024 that required tens of billions of dollars in emergency loans to affected small businesses.

The cumulative deficit for the 2024-25 American financial year is, so far, $US1.4 trillion ($2.1 trillion), with total debt now at $US36.2 trillion ($55 trillion).

America accounts for about 26 per cent of global GDP, but 35 per cent of sovereign debt.

This week, the US Senate and House passed their versions of Trump’s Big Beautiful Bill. For all the arguments about what’s in the bill (extending tax cuts to wealthy Americans, cutting food stamp funding to the poor in some states), the big issue is its cost.

By some measures, it’s the biggest single spending bill since the 1960s. The Congressional Budget Office estimates it will add $US3.3 trillion to federal deficits over the next decade. Republican lawmakers, and Trump, have tried to argue this isn’t true.

But the bill also includes a provision to increase America’s debt ceiling by $US5 trillion. You don’t need to increase your debt ceiling if you truly believe your policies aren’t going to increase debt.

The bill’s financial ramifications have been central to the falling out between Trump and his former best buddy, Elon Musk. The Musk-Trump fight is just a sideshow, however, to the ongoing pressure the president is exerting on Powell to lower American interest rates by up to 2.5 percentage points.

Happier days … Elon Musk and Donald Trump, well before the tech billionaire started attacking the US president’s Big Beautiful Bill.Credit: AP

While Trump was comparing American interest rates with those in Libya, Powell was in Portugal for a meeting of some of the biggest names in central banking.

Sitting on a panel with the head of the European, English, South Korean and Japanese central banks, Powell was asked about his future and the latest Trump attack.

“I’m very focused on just doing my job,” he said.

That prompted a round of applause from the assembled central bank nerds. A man said he’s doing his job, and the response was adulation. That’s how weird the world has become.

Powell was also asked about the Big Beautiful Bill and the state of the American budget.

“The US fiscal path is not a sustainable one. The level of debt is sustainable, but the path is not, and we need to address that sooner or later. Sooner is better than later,” he said.

That’s what Trump doesn’t want to hear. A dose of reality about his fiscal policies that are going to leave the US with huge financial problems for years and years (including after Trump has left the White House).

RBA governor Michele Bullock has good reason to be happy how the bank’s policy settings have delivered an economic soft landing.Credit: Alex Ellinghausen

It’s a world away from the situation that will play out here in Australia next week.

While there has been some tension between governments and Reserve Banks over the years (prompting all sorts of pearl-clutching), we haven’t reached the stage of a prime minister demanding the resignation of the governor (as Trump has done repeatedly of Powell).

And Bullock can rightfully point to the scoreboard, which at this point shows inflation falling, people in work and the economy growing.

Another cut on Tuesday would help the economy pick up a little speed, bring some relief to households whose real disposable income is still well short of where it was during the pandemic and give the country some insurance against whatever move Donald Trump makes next.

That’s as close as a Reserve Bank governor will ever get to declaring victory.

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