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West Australian
6 days ago
- Business
- West Australian
Dimitri Burshtein & Peter Swan: If RBA slashes rates this month, it will be giving in to political pressure
It may be heresy to say, but the case for an official interest rate cut at the coming RBA monetary policy board meeting is exceptionally weak. Austrian born economist Friedrich Hayek once observed that 'the root and source of all monetary evil is the government's monopoly on money.' In Australia, that monopoly takes form in the RBA — an institution notionally independent, but increasingly susceptible to political pressure. Following recent data which showed inflation remaining within and not below the RBA's target band, the usual chorus of economic commentators and political actors have launched into a ritualistic call for a rate cut. And as the August 2025 Monetary Policy Board meeting approaches, these calls are growing in both volume and vehemence. For the RBA to heed these demands would not simply be an error but it would represent a further descent from a disciplined monetary authority into a compliant servant of political convenience. The RBA's mandate is neither ambiguous nor advisory. It is enshrined in legislation: to ensure price stability, full employment, and the economic prosperity of the Australian people. Nowhere in the RBA Act is there an obligation to underwrite misguided fiscal policies or to provide political cover for governments unwilling to confront the consequences of their own policy malpractice. Yet that is precisely what a rate cut would amount to at this juncture. A backdoor bailout of bad fiscal and regulatory policy suppressing economic growth and productivity all under the guise of independent monetary policy. Evidence of persistent economic pressures across key sectors of the economy abound. These pressures are not being driven by private sector exuberance but by reckless fiscal expansion at all three levels of government. Governments have overstimulated demand while constricting supply through over-regulation, sky high energy costs, and an expanding public sector that absorbs available labour. In this context, a rate cut would simply exacerbate the underlying causes of Australia's economic malaise by further distorting the allocation of capital and labour, rewarding inefficiency while penalising prudence. There is equally no compelling case for monetary stimulus based on labour market data. Unemployment remains historically low. And while there are tentative signs of a slowdown in private sector hiring, the slack is being absorbed by growth in the public and care economy. If the RBA cuts rates now, it will not be reviving a flailing private sector. It will be validating a dangerous economic realignment: one that favours public consumption over private investment, short-term palliatives over structural reform, and ideological convenience over empirical rigour. Prevailing arguments for a rate cut are based in the flawed logic of the Phillips Curve — the mid-20th century economic model that posits a trade-off between unemployment and inflation. But the Phillips Curve has failed repeatedly. It failed to anticipate stagflation in the 1970s, failed to explain the low-unemployment, low-inflation paradox of the 2010s, and fails to grasp the unique drivers of today's price instability. Continuing to base policy on such a model is akin to navigating a storm with a broken compass. Real world outcomes have diverged too often from its predictions to treat it as a reliable guide. To make matters worse, Australia's currency has declined by more than 7 per cent over the past five years. In a country that imports the majority of its essential goods — from fuel to food, electronics to pharmaceuticals — a weaker dollar has a direct effect on household costs. A rate cut now would almost certainly further accelerate currency depreciation, amplifying imported inflation. This risk alone should give any responsible policymaker pause. Yet the calls for easing continue, not because the data demands it, but because habit, ideology, and political cowardice conspire to make it seem palatable. A rate cut in August would additionally punish savers, reward speculators, erode the purchasing power of the dollar, and send an unmistakable message that the RBA no longer takes its inflation target seriously. Worse, it would reinforce the delusion that the bank exists to smooth every bump in the economic road, regardless of whether that road was poorly built to begin with. This is not just an Australian phenomenon. Since the tenure of Alan Greenspan in the US, central banks around the world have morphed from guardians of price stability into crisis managers and economic nannies. The so-called 'Greenspan Put', the expectation that central banks will always ride to the rescue at the first sign of market discomfort has corrupted monetary policy, undermined fiscal discipline, and left global economies addicted to cheap credit. The result has been decades of asset bubbles, rising inequality, chronic debt dependence, and an institutional inability to endure even mild economic correction. Monetary policy must return to first principles: price stability first; everything else second. If the RBA hopes to preserve its credibility, its independence, and its very relevance, it must hold the line, ignore political pressure and not cut the official interest rate. Dimitri Burshtein is a principal at Eminence Advisory. Peter Swan AO is emeritus professor at the UNSW-Sydney Business School.
Yahoo
07-04-2025
- Business
- Yahoo
RBA urged to use special power to cut interest rates this week: 'Risks are now extreme'
The ASX 200 plummeted 461.40 points or 6.02 per cent to 7,206.40 on Monday's opening bell and the Australian dollar was buying just 59.92 US cents. The last time the dollar traded below 60 cents was for one day in April 2020. By the time you read this, the markets are likely to have moved dramatically from where they are now. Such is the nature of the money market reaction to the destructive policies of the Trump administration to impose across the board tariffs. One thing that is known is that the effect of the tariffs will be to depress international trade and with that economic growth. Countries like Australia, where between one-fifth and one quarter of the economy is based on international trade, the fallout could be ugly. The extent of the downside can and should be cushioned by proactive policy action from the Reserve Bank of Australia (RBA). RELATED RBA's superannuation warning amid $50 billion ASX plunge: 'Chilling effect' Superannuation cyber attack update after 'retirement funds stolen' in co-ordinated breach Dire warning over decaying Australian dollar: 'Below 50 cents' Because of the obviously negative effect on Australia, the Monetary Policy Board (MPB) of the RBA should use Section 25AN of the RBA Act to hold a meeting this week to deliver an interest rate cut. 'The Monetary Policy Board must hold such meetings as the Board determines are necessary for the efficient performance of its functions," the Act states. 'The Chair of the Monetary Policy Board may convene a meeting at any time.' Easier monetary policy, as was applied in the Global Financial Crisis in 2007 to 2009 and again during the COVID pandemic in 2020 to 2022, put a floor under economic activity, and in the process saving thousands of jobs and businesses in the process. It worked well. Low inflation, a weaker labour market and what were obvious risks to the global economy a week ago, when the RBA met and refused to cut interest rates, are now extreme. It is a long six weeks until the next scheduled meeting of the RBA MPB, 20 May in fact, during which time the downside risks to the economy will intensify if the RBA does nothing until then. A decision to delay easier policy will costs tens of thousands and jobs, something that is against the RBA mandate to maintain full employment. It would not be an emergency meeting or smack of panic, both which are emotive terms. Rather it would be the prudent functioning of the RBA as it deals with a very serious and hugely significant shock to the Australian economy. The issue that should be canvassed at this 'special' meeting is whether to cut 25 or 50 basis points, such is the nature of the risks to the economy and the starting point of the official cash rate at a restrictive 4.10 per cent. At the time of writing, and this will change with updates on the global market ongoing reaction to the tariffs, markets are expecting over 100 basis points of interest rate cuts by the end of 2025. An interest rate cut would not be a surprise. The RBA should step up and meet these expectations. In the process, Governor Michele Bullock can give a press conference on indeed, a series of press conferences in the weeks ahead to update the public of its strategy to deal with this negative shock to the economy. As part of these market ructions, the Aussie dollar has slumped to US60 cents having been around US 59.4 cents at one stage. The RBA MPB is unlikely to be swayed by this move, because the currency is floating and as such, it adjusts up and in this case down in response to the unfolding news. Commodity prices are also crashing in the market mayhem, with oil below US$60 a barrel, copper prices down 8 per cent, gas and other commodities down sharply. The Australian dollar fall is justified and the RBA should not and indeed, will not stand in the way. The bottom line is that what is happening is serious, it is negative and monetary policy as it stands is inappropriate for the current conditions and more importantly the economic outlook. Sign in to access your portfolio
