What Is Next for Australia’s Economy?

Where Will The RBA’s ‘Narrow Path’ Take Them?

T. S. Gupta

INFLATION HAS BECOME THE BIGGEST CHALLENGE that the Australian economy needs to overcome. Australia had a reasonably strong recovery from the Covid-19 pandemic, particularly due to the effects of JobKeeper and JobSeeker. Yet, due to a myriad of international and domestic factors, the fear of recession, that once dominated headlines, has returned.

The Reserve Bank of Australia (RBA) has always been the guiding force behind the path of Australia’s economy, through adjustment of the cash rate. However, it seems as if they have backed themselves into a corner with recent rate increases. Inflation is currently at 5.4%, with the cash rate having steady increases of 25 basis points throughout most of this year and last year.

The Ex-Governor of the RBA, Philip Lowe, gave a speech at the Morgan Stanley Australia Summit on the 7th of June, detailing the narrow path the RBA finds itself on. Lowe’s appearance shows how the RBA is particularly worried about inflation, which is proving incredibly sticky and hitting different parts of the economy in vastly different ways.

And even though the RBA does aim to do the best for Australia, Lowe expressed how he has little choice but to hit a divided economy with the blunt instrument of interest rates. While he argued that the Australian economy “remain[s] on the narrow path” to a soft landing, it is becoming increasingly evident that inflation is posing greater and greater risks to the Australian economy.

As rates continue to rise, with economists predicting even further rate rises, it begs the question of when we will see inflation return to the target of 2-3%.

Households and businesses are struggling to cope, and the threat of rising unemployment, not to mention rising rates, jeopardises the RBA’s proposal of a “soft landing”.

The primary issue with tackling this inflation is that the RBA does not have much power to influence it. The RBA has no influence over government decisions as an independent body. As a result, the government did not consult with the RBA on the structure of JobKeeper and JobSeeker, leading to many workers being overcompensated. The Russia-Ukraine war has further exacerbated the nature of this inflation. Adjusting the cash rate has a marginal impact on the effect of reducing the effect of these factors on the inflation crisis.

It appears that the RBA’s idealistic “soft landing” may not eventuate. For now, the nation waits until next Tuesday to see what will happen and where the economy is going.