Last Tuesday, the RBA decided to cut interest rates to the historic low of 1.5% – a level that is unprecedented in Australian history. And yet, the enormity of this action goes largely unnoticed by the general public. While monetary policy has never been particularly sexy, this act does point to a large problem within the Australian economy.
The RBA has it’s hands tied, trying to cushion the fall from the end of the mining boom, as well as controlling ever rising property prices in metropolitan areas.
All economies go through booms and busts. These relative ups and downs are known as ‘business cycles’. What causes these business cycles to occur, and how to mitigate them, is one of the most contentious issues in economics and far ,far beyond the scope of this article. However, a general consensus has formed suggesting that adjusting interest rates can ‘smooth’ the business cycle, leading to less ‘booms and busts’ and more certainty.
A fact that is instrumental to understanding this rate cut is the regional nature of the Australian economy. Australia consists of a fairly industrial/service-based south-eastern economy with mining/agriculture dominating the rest of the country. The ‘two-speed economy’ makes assessing the economic health of Australia difficult. For example, according to Trading Economics, the annual growth rate of GDP in Australia as a whole was 1.1% for the year. Not great, but consistent with other similar economies. However, this figure is misleading. According to Andrew Charlton, the former economics advisor to Kevin Rudd, there is ‘strong growth’ of 3.9% in NSW and 3.2% in VIC, with recession-level growth of -1.8% in QLD. But the most alarming of these is WA, with a growth rate of -4.2% – a level consistent with a ‘deep recession’. Quite a different story from the Australia wide figure.
And so we return to the RBA and their historic rate cut. For the RBA, these regional differences pose a huge problem. They can only implement one interest rate to try and match the economic conditions of the 8 different states and territories. This is a monumental, and somewhat contradictory task. Having an interest rate suited for WA could lead to further inflating the property bubble in NSW, however, having an interest rate suited for NSW would prolong the suffering of the end of the mining boom in WA. Seemingly, the RBA’s best bet is to split the difference and have an interest rate of 1.5%. Much like a margherita pizza, this policy appeals to all and satisfies none.
This regional nature of the Australian economy is a complex problem with many different factors. What is required is an approach that serves all states, not just the abstract concept of ‘Australia’. Given the ‘two-speed’ Australian economy stands to be with us for a little while longer, and it’s time that both state and federal governments develop an aligned policy on this issue of structural importance.
Rob Morris is the Secretary of the ANU Society For Economic Science