Monetary Policy / Interest rates

Splendid overview of RBA counter-productivity from my friend and colleague Martha:

In November 2024, The Reserve Bank Act was ammended. The changes now required the RBA’s monetary policy board to determine the monetary policy of the bank to stabilise prices in Australia, to maintain full employment in Australia and stabilise Australia’s financial system.  The Reserve Bank’s role was to prevent banks from destabilising the financial system to prevent credit crashes. The Statement on the Conduct of Monetary Policy-Reserve Bank was an agreement between the Treasurer Jim Chalmers and the Reserve Bank Board on the 10th July 2025. The agreement provided full operational autonomy to the RBA’s Monetary Policy Board, underlining the RBA’s goals of price and inflation control.

Somehow the ‘economic prosperity and welfare of all Australians’, got swapped out for keeping the banking sector stable. Now whilst the concepts might be related, stabilisation of Australia’s financial system is no guarantee of either economic prosperity or welfare for all the people of Australia. The RBA has also completely reinterpreted the term ‘full employment.’

Specifically the RBA’s statement of monetary policy explains ‘to achieve its statutory objectives, the Bank sets monetary policy to keep inflation in the economy to 2%-3%, and employment at the desired level that is consistent with maintaining low and stable inflation. In other words, there always has to be a level of ‘natural’ unemployment to avoid inflation.  Dr Kelly notes that even when inflation is within the RBA’s desired target range of 2-3%, the RBA does nothing to stop unemployment rising by lowering interest rates.

(Thanks for the name check, Martha.)

Governor Michelle Bullock has admitted that the RBA is basing its actions on the expectations of inflation, rather than direct observation of inflation. The RBA relies on the NAIRU (the non accelerating inflation rate of unemployment). The NAIRU cannot be directly observed or measured, it can only be inferred. My colleague, economist Katy Swain, hilariously calls the NAIRU, the RBA’s ‘invisible friend.’

The boom in private markets since the 2007-2009 financial crisis has been huge, mainly relying on very low interest rates to rack up debt on the companies purchased. After central banks around the world slashed interest rates to near zero in response to the 2008- 009 financial crisis, private equity embarked on its longest and most powerful boom. In 2021, the market’s zenith, a record $1.2tn in deals were struck, according to PitchBook data.

Economic slumps provide fresh blood for these vampires as small companies struggle in recessions. In 2008-9 slump and in the pandemic slump, private equity firms announced ‘approaches’ to more than twice as many listed companies as they had ever done previously. And private equity company, Bain Capital’s managing partner John Connaughton commented: ‘One of the most productive periods for us was after the global financial crisis.”

But now a series of rapid interest rate rises since 2022 has dried up much of the fresh blood that vampire PE funds need and many private-equity-backed companies are saddled with large debts and face much higher interest costs. Default rates are picking up and lenders are increasingly taking control of creditor companies at the expense of equity owners. 

[…]

Over the last two decades, the vampires of private equity have gorged themselves on the profits of labour in the companies they have sweated, while avoiding sharing those profits with their investors or with governments through taxation. They engage in various forms of ‘financial engineering’ to increase their gains. And in doing so, they have leveraged key sectors of the economy into huge debt, at the expense of productive investment. Now rising debt servicing costs are adding to the risk of a major financial crash, acting as a stake through the heart of many of these vampires.

Rents have rocketed and property prices are hot, but the Reserve Bank of Australia (RBA) has changed the way it looks at the market and a key analysis panel that examines housing issues has not met for more than a year.

The Housing Market Discussion Group brought together internal experts to share insights on household budgets, the lending markets and the stability of our financial system.

It hasn't met since September 8 2022.

Documents sought through the Freedom of Information (FOI) process reveal the most recent meeting of the group — also known as the Domestic Housing Community Meeting — was one day after the central bank hiked interest rates for a fifth time.

Successive governments that failed to build social housing whilst selling off social housing stock are partly to blame for this.

So, too, are the actions of some unscrupulous landlords.

But the real problem can be laid fairly and squarely at the door of the Bank of England. They forced interest rates up without any evidence that doing so would reduce inflation. So far, the contrary is likely to be the case. And now they are using quantitative tightening to keep those rates artificially high - and well above those that markets might otherwise settle on given the state of the economy.

The result is not just a cost of living crisis.

Nor is it just a massive decline in the financial well-being of millions in this country.

It is also an alarming hike in rents, which are, however, insufficient to cover the costs of some highly-geared (over-borrowed) landlords who are selling their properties as quickly as they can, so increasing the scale of homelessness and disruption, whilst also removing property from the rental housing stock, at least temporarily. It's a perfect storm for the councils involved, and it can only get worse since it is the policy of the Bank of England to maintain high interest rates as inflation declines, which can only make rents increasingly unaffordable whilst forcing more landlords out of business.