Why the RBA held rates

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While many experts thought a rate cut was all but a sure thing, people with mortgages across the country have been left shell-shocked by the RBA board's announcement it will keep the cash rate steady at 3.85%.

Treasurer Jim Chalmers says it's not the result millions of Australians were hoping for.

Well, yeah, no, ain't that the truth?

But will this result read as an early economic loss for Labor?

And with global economic instability continuing, is this a sign there are more rough economic waters ahead of us?

Welcome to Politics Now.

Hi, I'm Patricia Carvallis.

And I'm Tom Crowley.

Now, Tom, everyone was waiting, predicting pretty confidently, clearly overly confidently, because they were dead wrong, overwhelmingly in fact, that we would see a 0.25% cut that brought down rates.

But it didn't happen.

They kept rates on hold.

The reason I've read the statement as of you is basically a couple of things.

too much uncertainty around the world.

They need more time.

They're always asking for time, these guys.

But Tom, why?

Why have they done this?

just when you thought we could write the script ourselves peaky well we did and we threw it out well we did

yeah that's right

we did have a script guys that we thought was certain to be used we threw it out we've recast the whole thing but tom seriously why

that's right and people say economists get their models wrong but you know you try predicting what's going to happen next in the economy look it was a surprise not entirely out of the realms of possibility.

A couple of people have pointed out that the RBA and a lot of central banks, when they begin the cutting phase, sometimes they like to just go too slowly.

They don't want to give a sense that they're going quick, quick, quick, cut, cut, cut, especially with so much global uncertainty.

So maybe they would like to have a one-on-one off sort of approach to meetings.

That does seem to be now the pattern that they're following because they certainly haven't changed their language in any fundamental way to suggest that this fight against inflation, which has pretty much looked vanquished.

Inflation has been sitting pretty comfortably in that 2% to 3% ban for a while now.

And the RBA has been clear and remains clear that its focus is on the next challenge coming around the corner in the global economy, not so much on the inflation fight that has dominated the last few years.

And yet, just a couple of those caveats that have always been there.

The labor market being, you know, still very tight, unemployment so low, so that there's some suggestion of heat there.

Wages still growing faster than productivity can sustain.

Productivity is that horrible buzzword that no one really likes talking about.

It's the biggest meeting now, hey?

Well, absolutely.

It's something that's on the government's agenda.

How can we boost not about making people work harder?

It's always important to say that, but productivity really working smarter, not harder.

How can we get more out of what we have?

That's the sort of magic source that economists think can keep the economy growing and wages growing and prices growing sustainably.

And so without that, the Reserve Bank has always been sounding notes of caution that that's maybe the last thing left before we can declare victory against inflation.

And so, this statement, it did say, look,

there are risks on either side, but we feel like with all this global uncertainty, the rates come down a little bit already.

We're well positioned for whatever might come next.

That's the view, I can't say of the RBA, of some of the members of the RBA board.

So we've got to get to this because it's the first time

that we know not the names, but of the numbers and how they voted.

And what we know is that six people on that board voted for this decision.

Three didn't.

The treasurer was asked about, well, you know, who are they?

Tell me more.

He said the transparency of us knowing the numbers is important.

But Tom, I find this fascinating because he did leap on it, you know, talked about the transparency and respect for the RBA board, but he was enjoying kind of

making the point too.

Look at this.

Who are, you know, don't you reckon he was like, look at this.

Three thought this wasn't a great idea.

Absolutely.

And look, you know, so this goes all the way back to the RBA review that started under Josh Frydenberg and landed under Jim Chalmers.

And I think when a lot of people looked at that review, we were all caught up in the land of rates going up.

We were all caught up in being angry at Phil Lowe.

And so a lot of people missed some of these little details.

Two of the key ones being the RBA governor should have a press conference after every meeting.

And hasn't that completely changed the complexion of Rates Day?

How much more we hear from her?

Yeah, and just to be clear, we're recording this right after the Treasurer has spoken.

The RBA governor will speak soon.

She will be grilled, can I say, like you say,

on why, on the why, and also I think the split.

So anticipate that.

But the treasurer is trying to sort of defend her independence, her board's independence.

But at the same time, like, like we need to read the politics here, he's saying...

This is not the decision millions of Australians would have wanted.

Hint, hint, nudge, nudge, including us, but I'm not going to say it.

That's really what I'm saying.

That's right, absolutely.

And this publication of the vote count,

it was this quiet little earthquake.

And I think I and a lot of keen RBA watchers have just been waiting for this one to drop, thinking this is really going to change the way that we think about these things because it injects from the RBA itself this element of disagreement that has always been there.

We know the board deliberates and hashes it out, but we've never known exactly what those splits look like.

And there was a bit of debate that went on among RBA officials about exactly how transparent they would like to be there were points in time where there was a consideration of actually putting names to these votes but the view of Michelle Bullock as she sort of suggested and the view that seemed to emerge was we don't want to personalize the disagreements and have board members out in public you know essentially trying to argue with one another that that wouldn't be good for the confidence of the institution but there was a recognition that acknowledging that hey you know we think about this we could go either way we have disagreements in the room might help to underline confidence that that the rba thinks clearly about what it's doing but it creates this opening if you disagree and it just made it that much easier for jim chalmers not to cross the line he never wants to cross in actually directly criticizing them but saying hey there are a few people on that board we don't know who they are the treasury secretary mind you secretary of his department's on the board we don't know how she voted he doesn't know how she voted but there's now we're asking these questions looking closely at the people in this room in a way that we never have before and when it's a decision that shocks people disappoints many, I know in the office here there were lots of homeowners and I'm not among them, but homeowners who were saying that they'd already basically factored in the rate cut and started spending it or factoring it into their household budgets.

Yeah, never factor it in.

I've learnt not to be burnt.

There is a volatility in,

I think,

all of this.

And expecting that just because the market is leaning one way, that the predictions, the economists are saying one thing, that it'll happen, I think is,

well, it often can be wrong.

So I suppose suppose it leaves us to what's next.

Clearly, the RBA has made this decision.

It doesn't mean that's it for rate cuts, though.

I don't think that's quite what it means, Tom.

No, no, no.

No.

No, I think it probably will get one next time, and I'll be wrong again next time.

But, you know, I think that it's not certainly nothing has happened that's new that has changed the picture.

The arguments that have always been there for caution, and this has been true all the way along, the RBA has always balanced, as economists like to do, on the one hand, this, on the other hand that.

They've always expressed some reasons to wait and some reasons to go and different months depending on, you know, whatever, you can read the tea leaves about what makes them make these decisions, but they can lean either way.

So it's not some cataclysmic surprise in that sense that nobody could see coming.

It is just saying we're not in any rush.

We've cut twice already.

We can wait for more information.

and get a clearer picture.

So I don't think this changes the fundamental trajectory.

Inflation is still low, but it just means that it'll be another six weeks before they meet again to think again.

And the treasurer's frustration.

I mean, it's getting reported everywhere, headlines that, you know, he's expressed his frustration.

Has he, is there jawboning of the RBA?

You know, is he sort of publicly speaking out of line or is he keeping it just on the line?

Yeah, I mean, I think just on the line.

I mean, I was sitting in the room right up close to him and his facial expression, sometimes, you know, you can read things into them.

I think this is the line that has to always be there, right?

Because at the end of the day, you know, the Reserve Bank Board, they're not elected, but they kind of are elected in the sense that our politicians are ultimately the gatekeepers of whether they're independent or not.

It's a decision of Parliament to make them independent and what Parliament...

does, Parliament can undo.

And so this idea, you know, we have a belief in the importance of the independence of a central bank to give confidence to markets, to give more certainty, to leave it in the hands of the experts.

But we always know the sort of the sort of Damocles here is that a politician can one day take that away.

We see that in the States, Donald Trump, right, having a big old go at the Fed shared Jerome Powell, and how nervous that's making markets.

Because if the fickle whims of a president start being the thing that's making the decision about interest rates, then people really start to panic.

And so, look, on the other hand, the treasurer or the politicians of the day are always answerable to a really angry public who wants the RBA to have done something differently and who is angry at the central bank.

And so I think politicians are allowed to gripe and grumble in subtle ways and go right up to that line because they do need to be able to say to their constituents, yeah, I get it, I'm frustrated too.

But, you know, it's a very important principle that they don't step over it.

And Chalmers has gone right up against it a million times, but he doesn't step over it.

No, but he's gone as close to it as you possibly can get, I think, today, to be fair.

Look, the other thing is

he's, you know, he says, I don't second guess the Reserve Bank.

He says all of the right things, just which are the kind of opening statements, and then goes on to provide a sort of critique as he sees it from the vantage points of people with mortgages.

But equally, he does point out that inflation is in the lower part of the band that they're...

you know, that they're their target band.

He's right on that metric, though, isn't he?

Because if we've been aiming for this range for interest rates to start coming down, well, that's right, isn't it?

I think he's right to express that the economy is going in the right direction.

The counter to that, though, would be that doesn't necessarily automatically mean that we have to keep getting rate cuts and rate cuts and rate cuts, right?

I mean, I think there's an argument that the rate before this whole tightening cycle under Phil Lowe began had been stuck a little lower than the Reserve Bank would have liked it to for a very long time, sort of close-ish to zero.

And in an ideal world, the Reserve Bank would probably like to settle.

I like to sort of talk about it as in the middle of the goals in football, soccer, so that you know, you, as the goalkeeper, you could kind of be free to jump either side, depending on the kind of economic challenge that comes next to respond to.

So we shouldn't think we're going to go all the way back down to where we were, and that that's the measure of success.

And that's where the Reserve Bank is saying, yeah, we'll probably have some more cuts to come over the next few months as we begin to move towards what might be the new normal.

But unemployment's still really low.

We're not seeing the kind of weakening in the economy that tells us, oh no, we went too far and oh no, quickly cut, cut, cut, let's let's undo the damage.

We're not seeing any sign of that.

We're just seeing a sign that we've kind of gotten rid of that period of inflation that we were worried about.

There are risks on this side, there are risks on that side.

There's no need to move rashly.

So I think Chalmers is right to, and no politician will ever declare victory on this theme because people don't like hearing you declare victory when you're a politician and talking about the economy and they don't feel like things are going well for them.

We had Susan Lee today once again saying inflation is still too high.

I think she might need to update those talking points, but it just goes to show that the default for an opposition is just to keep complaining and a lot of the public will hear that and nod along.

So it's not about a declaration of victory as such, but I think he is entitled to, regardless of this result, say things are moving in the right direction.

Now, the RBA governor is on her feet now, giving a press conference.

She says this, and I want to put it to you, economic conditions remain uncertain, and we're waiting to confirm whether inflation is still on track to sustainably reach 2.5%

since the May meeting.

So basically, I'm worried about the world.

You know, elephant in the room, Trump.

So much uncertainty.

We're holding fire, guys.

Now, she's going to be swamped with questions, but that's pretty much consistent with the statement, right?

She's not going to be acting prematurely.

She's compared us to other nations that put rates up faster, also put them down faster.

We've taken a different approach, right?

Totally.

I mean, if you leave aside the question of where the rate is now and perhaps we'd like it to be a little bit lower, it's probably a reasonable disposition for a central bank to have at the moment because, I mean, a lot of the scenarios that we think about with Donald Trump and global uncertainty and what if there's a, you know, like some sort of broad panic, a lot of those scenarios are recessionary, the kind of situation where the RBA might want to be cutting and stimulating the economy.

But you think about what happened at the end of COVID with disruption to supply chains, right?

Or, you know, know, a ship getting stuck in the Suez Canal.

The unpredictable world that we live in, you know, Trump could unleash something that stops global supply chains from functioning the way they should.

And then we have another burst of inflation again.

Or the Middle East situation.

And, you know, we're watching oil prices so carefully when Israel and Iran were escalating tensions.

So things like that, again, you don't know which way is the goalkeeper you're going to have to jump.

And that's where that caution about how will the world play out from central banks is understandable because they could be needing to raise rates again to jump on top of fresh inflation or they could be needing to cut again and that's that's what makes their job genuinely a hard one.

Yeah, who wants it?

Probably lots of people.

Look, it's quite a lot of power there too.

Look, the tariffs obviously are playing into all of this and Trump's uncertainty.

But in terms of our tariff and that 10% benchmark one, we're hearing consistently from the government that it's the lowest deal.

Sounds to me like the white flag's gone up.

They know they're not going to get a deal.

They're not, you know, they've trod lots of channels.

There hasn't been a meeting with Trump yet, but regardless, they don't think they're going to get a deal, do they, Tom?

I don't think they do.

Radical acceptance has happened here.

Radical acceptance, but also, I suspect a decision that the cost of getting an exemption, if you thought it's good, is not worth paying.

Yeah, it's not worth paying because this thing just doesn't have a significant economic effect on us because 10% is the minimum that anyone's getting.

And so that means on the day the tariffs come in, it's bad news for anyone above 10 who in relative terms goes backwards but apart from that it's just the whole world gets a leg down compared to american competitors selling to the american market and that's what trump wants but for everyone else it's kind of equally bad news for those on on 10 percent and and that ultimately then gets passed through in large part to the american consumers paying more so the idea that we would give up something we don't want to give up in order to just be able to say look we got an exemption here's our piece of paper we can wave it around you know i think especially with big conversations looming on defense and some things that really matter to us, it's not surprising that some of those negotiating chips around critical minerals and some of that other stuff, maybe the government might want to hold on to those for the real fights that will come with this administration.

Yeah, and just finally, we have the official confirmation publicly today that the Prime Minister is going to China.

He's confirmed that he's going to meet, I think it's the second meeting with the country's president, Xi Jinping.

This is quite quite a significant moment.

He's going to Shanghai, Beijing.

We'll travel with journalists.

A big moment.

And again,

a little bit of politics ahead of any meeting with Donald Trump.

Xi Jinping is better at making dates, it seems, with our Prime Minister than the U.S.

president, our closest ally.

A little bit awkward.

A little bit awkward, isn't it?

Usually your mates

are better at meeting meeting with you than your frenemies, right?

Unless your frenemy is really clever.

Well, yeah.

I reckon if you can get Anthony Albanese, it is to line up, you know, his order of preference for how he'd like this to play out.

Option preference number one is I get a meeting with Donald Trump tomorrow and it goes great and he says he loves me and he gives me a nice little announceable.

Option number three is I meet with Donald Trump and it goes terribly and he yells at me or he dims the lights in the White House and he plays some video that I don't want to watch and I'm embarrassed.

Option number two in the middle is, well, I don't meet with him and people criticize me for not meeting with him.

But hey, at least nothing bad has happened.

And that seems to be the holding pattern that we're in now.

Obviously, not Albanese's fault because Trump had to leave the G7 for good reasons.

But look, he would like to get that meeting done sooner rather than later.

At the same time, though, as we were talking about on Sunday, he's making noises about Australia standing on its own two feet, being an independent country.

U.S.

alliance.

That's right, make its own decisions.

But when it comes down to AUKUS and that defence spending number, you know, ultimately we saw Trump come to the Europeans and say, if you want to be our friend, you've got to pay.

And they thought about it for five seconds.

They opened their pockets and they said, yep, we can't defend ourselves.

It's worth paying.

It's hard to see that Australia is going to answer anything different to that.

Frankly, whatever noises the Prime Minister is making at the moment, we'll see.

So much to talk about.

Thank you for joining me today.

A pleasure, PK.

Thanks.

There's a bit going on this week.

It's been a quiet old June, but we're starting to get a little bit more politics going on, aren't we?

Yeah, I reckon it's absolutely heating up.

Tomorrow, I'll be joined by Brett Worthington for more analysis.

Thursday, it's the party room.

You can email us at thepartyroom at abc.net.au, Fran, and I will answer your questions.

See you, Tom.

See ya.