Overnight the Federal Reserve in the United States cut their interest rates by 0.25 basis points. It is the second reduction in US interest rates this year.
In contrast the Reserve Bank of Australia hasn’t cut rates at all in 2024, and after its meeting earlier in the week issued a statement saying that it won’t be doing so until early next year at the earliest.
Australians have endured no less than 12 interest rate rises since the last election.
So no interest rate cuts for Australian borrowers this year but two rate drops in the US. Why the difference?
RBA Governor Michele Bullock said after this week’s board meeting that Australia’s underlying inflation rate remains too high for rates to come down.
Especially when that reality is coupled with too much government spending, putting upward pressure on said inflation.
In contrast the inflation rate in the US is lower than ours, making it easier for its central bank to therefore now reduce the cash rate.
But there is another crucial difference that explains why US rates are coming down and ours aren’t.
US rates are higher to begin with. Despite the two reductions in US rates this year, their cash rate remains higher than ours.
The Australian cash rate is currently 4.35 percent. In the US it sits at between 4.50-4.75 percent, even after the overnight 0.25 point cut.
So Americans with loans are paying higher interest rates despite the recent cut and despite lower inflation than ours.
This is precisely why politicians demanding the RBA cut our rates are playing the populist card without regard to what’s appropriate and possible.
The Americans more aggressively raised rates when the RBA didn’t in the ‘fight against inflation’ over recent years, which is serving them well now.
It is a major reason US inflation is lower than ours and it is why their rates are therefore coming down.
While Labor MPs and partisan economists have tried to point to Australian headline inflation falling back into the RBA’s target range of 2-3 percent, we already know that’s a largely meaningless data point.
Headline inflation includes the trickery of Treasurer Jim Chalmers designing energy rebates (in his last budget) in a way that temporarily and artificially brings the headline inflation rate down.
Independent economists have called him out on it until they are blue in the face.
The underlying inflation rate cuts out the Treasurer’s trickery by excluding the effects of his energy rebate on the inflation number. Hence underlying inflation is much higher than headline inflation.
Go figure.
Which is why the RBA Governor says it is the only figure of the two she looks at when deciding what to do about rates. And rightly so.
If Chalmers doesn’t understand this important distinction, it simply highlights his lack of economic training. Partisan economists who try and focus on the headline figure simply expose their own lack of credibility.
Of course Chalmers and the unnamed partisan economists understand the difference. They just hope you don’t, so that their trickery and false narratives work politically.
So, yes, Australia’s inflation problem is homegrown, despite political attempts to claim otherwise.
And the US central bank is to be commended for the hand it played in bringing its inflation rate down.
Not something you can say about the RBA, even if it is to be commended for resisting the political pressure to bring rates down now before inflation gets properly back under control.
