Australia’s central bank is embarking on an unorthodox monetary policy experiment—by keeping interest rates unchanged. While many developed economies have already entered easing cycles, the Reserve Bank of Australia (RBA) has held its cash rate at a 13-year high of 4.35% since late 2023, and most economists expect this stance to continue until at least February 2025.
However, the limits of this strategy are becoming increasingly apparent. Recent data released on December 4 revealed that Australia’s gross domestic product (GDP) had contracted for the seventh consecutive quarter on a per-capita basis, marking the longest such stretch since 1991, excluding the pandemic period. Despite this, core inflation remains stubbornly above the RBA’s 2-3% target range, adding to the pressure on policymakers.
The weak GDP figures had led some economists, including those at Goldman Sachs, to anticipate a “dovish pivot” in the RBA’s policy at its final meeting of the year on December 5. However, markets and economists expect that no rate cut will come before Christmas, with the RBA likely holding firm until at least April 2025, just ahead of a federal election.
This prolonged period of inaction is creating tension between the RBA’s inflation-targeting board, headed by Governor Michele Bullock, and a government eager to secure a second term by offsetting high living costs through handouts and tax cuts. As money markets suggest, the RBA is unlikely to ease rates before April 2025, despite the ongoing strain on household budgets in a country with high levels of debt.
“It’s too soon to say whether the RBA’s experiment has been successful,” said Sally Auld, Chief Investment Officer at JBWere. “I have probably been on the more skeptical side, but I’m watching with keen interest.”
In 2022 and 2023, the RBA followed a global tightening trend but did not raise rates as aggressively as other central banks, prioritizing employment gains. However, unlike many of its peers, inflation in Australia remains above target, and the country’s labor market remains tight. If the U.S. Federal Reserve cuts rates for the third consecutive time in December, Australia’s cash rate could fall below that of the U.S. for the first time in six years, excluding the pandemic period.
Governor Bullock has explained that Australia’s monetary policy approach differs from that of other countries because inflation here remains persistently higher, and the labor market is also tighter. “Even with a similar approach to setting policy, the time to adjust domestic monetary policy settings can differ from peer central banks,” Bullock said last month.
Since the RBA began tightening rates in May 2022, Australia’s unemployment rate has risen slightly from 3.9% to 4.1%. However, the proportion of the working-age population employed remains at an all-time high, surpassing the OECD average, according to John Hawkins, a former senior economist at the RBA.
The International Monetary Fund (IMF) has characterized the RBA’s approach as “appropriate,” though it has refrained from offering a strong endorsement. “I think they deserve more praise than that,” said Hawkins, who is now a senior lecturer at the University of Canberra.
The effectiveness of the RBA’s strategy remains uncertain, especially with a federal election approaching, which could lead to increased fiscal spending. “We think expansionary fiscal policies will increasingly temper easing cycles, including the RBA’s, as fiscal settings and rising debt come into sharper focus for investors in 2025,” said Su-Lin Ong, Chief Economist at the Royal Bank of Canada.
Additionally, there is uncertainty about how U.S. policy changes under President-elect Donald Trump could impact Australia. The RBA discussed potential scenarios at its November meeting, concluding that any impact on Australia would likely be modest, though U.S. fiscal deficits are expected to grow, making global sovereign debt markets more sensitive to shocks.
Meanwhile, across the Tasman in New Zealand, the Reserve Bank of New Zealand (RBNZ) faces growing questions over whether it may have overdone its tightening cycle, having raised rates to 5.5%, the highest level since the 2008-2009 global financial crisis. The country is now on track for its second recession in less than two years.
“I think there’s a lot for us to learn from the two different approaches to monetary policy across the Tasman,” said Paul Conway, RBNZ’s chief economist, speaking at a parliamentary committee hearing on November 28. “It’s a wonderful natural experiment for macro researchers, and we will be looking closely at that.”
As Australia’s monetary policy remains firmly in place, its long-term effects on the economy—and the central bank’s approach to inflation control—will continue to draw attention from economists and policymakers both domestically and internationally.
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