The Reserve Bank looks ready to hike again on August 11, and half the economics profession is cheering it on. I’m not one of them, and here’s why another rate rise would hit the wrong target entirely.
The Reserve Bank Governor Michele Bullock has apparently given a strong hint that interest rates will go higher, which makes August 11 a live date for another hike. And a lot of economists think it’s a sound idea, while other economy experts either disagree or are not encouraged by their bosses to be too aggressive in their criticism of the nation’s central bank and their fearless leaders.
I don’t have a boss and it’s why I am going to argue that the RBA is set to make another bad decision. Former federal treasurer and Prime Minister, Paul Keating, has consistently argued that the RBA is “late to the party” in making rate cuts. He was stung by the 17% home loan rates in the 1980s which led to what he unwisely called “the recession we had to have.”
That was a political one-liner that has haunted Mr Keating because that was the worst recession for Australia since the Great Depression, though there was an element of truth, because it burnt out a lot of attitudes from vested interests (trade unions, overprotected producers and other suckers of the public teat) and ultimately created an economic era of no recession for near on 30 years. No modern economy has a recorded economic history of doing that.
Tough measures can deliver some unexpected pluses, but it also means other Australians will carry the can for the reforms that come out of a recession. Those include the businesses that go broke, the workers who lose their jobs and the homeowners who kiss goodbye to their homes.
For at least 30 years I have tracked, evaluated and publicly commented on RBA actions on newspapers like the Daily Telegraph, the Sun-Herald and The Australian, as well as covered probably over 300 interest rate decisions. And let me remind you that there have been good and shocker decisions.
When I had my TV show called Switzer on the Sky Business channel, there were a number of occasions when I railed against a Reserve Bank boss and copped some heat from critics. But history proved I was right. That said, like the RBA, sometimes I was wrong, but it usually was because of unseeable curve balls, like a pandemic or lying financial institutions in the USA, as in the case of the Global Financial Crisis.
Right now, there’s a curve ball called the post-budget housing fallout, which led to economist and bond fund manager Chris Joye at his Coolabah Capital Investments to surprise me in arguing that the 2026-27 Budget delivers something akin to two interest rates rises.
That makes me think that the RBA has hit us with three rate rises, Jim Chalmers effectively has given us another two, while the Trump-Iran war’s petrol price hikes have to be at least one bump up in rates.
While that feels like enough, right now the economic statistics aren’t screaming that the real world economy is weakening faster than the statistics that try to tell us what’s happening to businesses and consumers.
For example, the June employment report said 76,300 Australians found a job and unemployment remained at a low 4.4%, though it was 4.1% in December but no one can argue the jobs market is terrible, but governments and their public projects have helped create jobs, at a time when many parts of the private sector are reporting tough conditions.
NAB’s business confidence chart shows negative sentiment, not as bad as the Covid lockdown period but it’s pretty negative.
NAB Business Confidence
Meanwhile consumer confidence readings have similarities with the pandemic period.
Westpac Consumer Confidence
On economic growth, this is what Trading Economics reported: “The Australian economy expanded 0.3% quarter-on-quarter in Q1 2026, below expectations of a 0.5% increase and slowing from a 0.9% expansion in Q4. This marked the weakest economic growth in a year, as subdued household and government spending, adverse weather disruptions to mining activity, and weaker external demand weighed on the economy.”
And given all interest rate rises work negatively to depress demand with what economists call “a lag”, which can be longer than six months for lots of real world reasons, since February we’ve had six rate rises via the RBA, Chalmers and the Trump-Iran war.
So, on a day when we get the latest CPI take on inflation and we take on board what I’ve revealed above, I hope the RBA Governor is simply talking tough to possibly avoid another potentially wrong rate rise.
For the record, this is what she said yesterday:
She would take action to get inflation into the 2-3% band, “including by increasing the cash rate further if needed. Putting off a period of tight monetary policy today can mean higher rates and higher unemployment down the track. The further inflation moves from target and the more embedded it becomes, the harder it is to reverse. It’s also important to remember that inflation and capacity pressures in the domestic economy were already too high prior to the recent shock. I, personally, think getting inflation down and low and stable is critical because businesses do better in environments where they’re not worrying about cost pressures all the time.”
The Governor isn’t wrong, but I think using interest rates to offset the petrol price hikes from the Trump-Iran war, the wage rises pushed by unions, the excessive spending of the Albanese Government, the explosion of the public service and 1.6 million immigrants since 2022, is like bringing a knife to a gunfight or showing up with a gun with no bullets!
If today’s inflation number is too high, August 11 could be another sad day for those with a mortgage, but it will have zero effect on the nation’s big problems: a lack of productivity and a government not interested in doing anything about it.
