The RBA has chosen to do nothing in 2024. Here’s why

In the current cycle, the bank last changed rates in November last year. While it is okay not to move, it is the reasons for inaction that are most important.

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Inflation at the November 2023 meeting, when it raised the spot rate to 4.35 percent, was 5.4 percent and core inflation was 5.1 percent.

The most recent figures from the Australian Bureau of Statistics show inflation at 2.8 per cent, partly due to government energy subsidies, while core inflation is 3.5 per cent. In the 12 months to the end of September, economic growth remained stable at just 0.8 percent. Without public spending and population growth, the country would be in recession.

Some experts believed the country needed even higher interest rates, which would surely have crippled the economy.

I hear those of you with a mortgage say that the fact that inflation is falling and the economy is on life support should be enough for the bank to ease the brakes on monetary policy.

However, over the same period, unemployment remained stable at 3.9 percent. The fact that the country created nearly 400,000 jobs over the past year, two-thirds of which are full-time, testifies to a fairly tight labor market.

The strength of the jobs market is a problem for the RBA, which has long worried about a price-wage spiral as workers seek to keep pace with high inflation by demanding ever higher pay rises. important.

The term “price-wage spiral” last appeared in the minutes of the Reserve’s October 2023 meeting, just before the latest rate increase. But just as with Tasmanian tigers, reports of price-wage spirals in the wild no longer receive any credence.

Instead, wage growth slowed (from 4 percent to 3.5 percent), the number of insolvencies increased and property prices fell everywhere.

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Ah, real estate prices. The Australian board game that continues to enrich the elderly at the expense of their children, grandchildren and great-grandchildren.

The RBA ended the year by publishing a series of research papers, including one on the impact of interest rate changes on the level of home ownership in this country.

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

They came back with a resounding yes, estimating that at least a quarter of the decline in homeownership – among those under 40 it fell from around 60 percent to around 45 percent – ​​could be linked to low interest rates.

“As rates fall, house prices rise, increasing the down payment constraint on new mortgages and increasing the transaction costs of purchasing a home. Homeownership is declining,” they wrote.

We have found other ways to reduce the price of entry into a home for under 40s. State government stamp duty is just as culpable as low interest rates, researchers say. Then there’s supply, what’s happening 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 decline in interest rates over the past 30 years also reflects the success of central banks in controlling inflation. Low and stable inflation is an absolute positive – the RBA’s North Star.

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

If and when the RBA decides to cut interest rates next year, apart from the relief it will bring to millions of people with mortgages, it will prompt sighs of despair among the hundreds of thousands of Australians currently deprived of their own home. .

Add property prices to everything else that is affected by any change in interest rate settings, and you can see why the bank can sit idly by for long periods of time.

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

Shane Wright is senior economic correspondent for Age And The Sydney Morning Herald.