The Reserve Bank of Australia (RBA) has been under fire recently for its monetary policies, especially for refusing to lower interest rates in the face of growing political and popular pressure. 

Government officials and the opposition both worry that these actions are making the Australian people’s financial situation worse. According to Treasurer Jim Chalmers, there are two main issues that are “smashing the economy”: increasing interest rates and global uncertainty. 

Former Treasurer Wayne Swan accused the Reserve Bank of Australia (RBA) of seriously harming people all around the country with its policies, saying the bank prioritises economic dogma over good judgement. He claimed that by continuously raising interest rates, the Reserve Bank of Australia is “punching itself in the face” and straining the economy by causing consumer spending to decline.

The actions taken by the RBA have not significantly benefited Australian mortgage holders or tenants. Since May 2022, the Reserve Bank of Australia (RBA) has hiked the statutory cash rate thirteen times, placing a heavy financial hardship on a large number of households. Notwithstanding these advancements, inflation is still rather high. At the September Board meeting, the Reserve Bank of Australia (RBA) kept the statutory cash rate at 4.35%. 

The Reserve Bank of Australia is still quite concerned about inflation even though it has often risen over the target range of 2-3%. The Consumer Price Index (CPI) rose 3.9% in June 2024, suggesting that inflationary pressures had continued for 11 quarters running.

However, criticism goes beyond the issue of inflation. The governor of the Reserve Bank of Australia, Michele Bullock, has issued a warning, saying that the board does not believe rate reduction will happen anytime soon. 

This approach has sparked public and political debate, with many people calling for emergency aid to low-income households. New statistics released by the Australian Bureau of Statistics (ABS) paint a bleak picture of the state of the economy. It shows that the GDP per capita dropped from 1.5% to 0.4% for the sixth consecutive quarter. The longest stretch of constantly shrinking economies in recorded history is this prolonged recession.

Record-Low Spending by Households

The level of anxiety that households are facing is evident from the data. The June quarter had a 0.2% decrease in household spending, the lowest growth rate since September 2021’s Delta version lockout. 

Discretionary spending has been significantly impacted, falling by a significant 1.1%. Travel, events, and hospitality have been most significantly impacted by the 1.5% fall in spending on hotels, cafés, and restaurants. Consumption costs have dropped by 0.1%, meaning that even basic needs like food are now more reasonably priced as people cut back on their spending.

The savings ratio has also fallen to its lowest level in a number of years. For the last year, households have only saved 0.9% of their income, which is the lowest amount since 2006–07. This indicates that family earnings are growing at a rate that is noticeably slower than consumption, leading a considerable proportion of families to take money out of their savings accounts in order to pay for necessities.

Economic Growth from Government Spending

Despite the aforementioned challenges, the Australian economy grew by 0.2% in the June quarter, making it the 11th consecutive quarter of growth. But rather than being driven mostly by consumer demand, this growth was also the result of government spending. According to ABS estimates, government consumption, which mostly consists of funding for social assistance and healthcare initiatives, contributed 0.3 percentage points to GDP growth. State and local governments also raised their spending, putting a special focus on employee salaries and public services, to offset the weak domestic demand.

The Reserve Bank of Australia’s Limited Path

The Australian Reserve Bank works hard to maintain a precarious balance. Its principal aim is to protect the gains made recently in the employment market while also keeping inflation within the target range. By the end of 2025, the Reserve Bank of Australia (RBA) hopes to have met its inflation objective. However, careful interest rate control will need to be put in place in order to stop future economic development slowdowns.

The issue is that different industries are affected by inflation in different ways. Despite the fact that the COVID-19 epidemic and the Ukrainian situation have lessened supply disruptions, many firms still have difficulties. 

For instance, the rising expenses of construction and the significant rise in rental prices are driving up the cost of lodging. Similarly, as of June 2024, services inflation is still strong at 5.3%. There are several reasons for this, including lower productivity and salary increases, as well as higher company expenses for things like electricity, transportation, and insurance

Who is Impacted the Most?

Different members of society have been impacted by the present economic issues in different ways. Because they spend a larger percentage of their income on needs like food, power, and rent, lower-income households are disproportionately impacted by inflation. 

Higher-income households, on the other hand, allocate a larger percentage of their earnings to owner-occupied houses and discretionary spending, giving them more financial flexibility during weak economic times.

Younger and lower-income households have been more negatively impacted by the cost of living. Because they devote a larger percentage of their income to essentials like rent and utilities, they are more vulnerable to inflationary pressures.