Inside the Huge Challenge the RBA Is Facing Right Now
Australia finds itself in a rare economic dilemma — battling both rising inflation and increasing unemployment. While the Reserve Bank of Australia (RBA) usually relies on interest rate adjustments to steady the economy, this time, traditional monetary policy tools may not be enough to fix the problem.
The Current Economic Dilemma
Normally, higher interest rates help slow inflation by cooling demand, but that also tends to raise unemployment. Today, both inflation and unemployment are climbing — a scenario monetary policy struggles to resolve.
The RBA’s goal is to keep inflation between 2–3%, but the latest figures show it remains stubbornly above target. The U.S. faces a similar challenge, with core inflation over 3% and unemployment at its highest since 2021.
Why Interest Rates Aren’t Working
Monetary policy works best when it needs to either stimulate or slow an economy — not both at once. Raising rates cools growth and inflation; cutting them boosts spending and jobs. But when prices and joblessness rise together, the central bank’s hands are tied.
Analysts warn that interest rate cuts could help employment but would likely worsen inflation, leaving policymakers in a bind.
The Role of Price Shocks
Price shocks — such as surging petrol prices during the Ukraine war — often create this type of economic “stagflation.” In such cases, monetary policy alone can’t resolve the issue.
This time, however, petrol prices are stable, hovering around $1.80 per litre — roughly the same as last year — meaning other factors, like housing construction costs, are driving inflation.
Reducing housing inflation could be key to relief, especially as the cost of building new homes continues to rise.
Upcoming CPI Data Could Be Crucial
The next Consumer Price Index (CPI) report will arrive next week and could determine whether mortgage holders will see any relief soon.
ANZ Bank expects headline inflation to sit above 3.1%, warning that if “trimmed mean inflation” also exceeds 3%, rate cuts will be off the table for the rest of the year.
Commonwealth Bank predicts inflation at 3%, slightly more optimistic, but still outside the RBA’s comfort zone.
Both banks agree that the RBA’s next two meetings — in November and December — will likely end with no changes to rates.
The Bigger Picture
Experts believe that the solution to this economic stalemate lies beyond the RBA. Fiscal measures — such as lowering tariffs or easing construction costs — could help reduce inflation without hurting growth.
Until then, Australia remains in what economists call “a pickle,” waiting for coordinated action between the RBA and government to steer the economy back on track.
