The RBA decision: Australians pay the price for an economy governments help shape

Australians will watch the Reserve Bank this week for a number. Behind that number sits a much larger question: why does bringing inflation under control require households and businesses to keep absorbing more financial pressure?

The cash rate is the most visible scoreboard in Australian economic life. It reflects the Reserve Bank’s assessment of inflation, spending, employment and the economy’s ability to meet demand.

But the conditions producing that assessment develop over years. They reflect government decisions, private investment, global events and the accumulated consequences of failing to expand essential capacity.

When housing is scarce, energy is expensive and productivity is weak, the consequences eventually reach household budgets.

The Reserve Bank then faces the task of restraining demand in an economy where many of the costs troubling Australians are difficult to avoid.

Its next decision is scheduled for Tuesday, 3 November, at 2.30pm AEDT. The cash rate currently stands at 4.60 per cent. Whatever the decision, the deeper economic questions will remain.

The pressure behind the number

The latest inflation figures explain why this meeting matters.

Consumer prices rose 4.3 per cent over the year to September, up from 4 per cent in August. Annual trimmed mean inflation, which helps identify the broader underlying trend, increased to 3.6 per cent. Both measures remain above the Reserve Bank’s 2–3 per cent target range.

For households, those percentages describe another increase in an already elevated cost of living.

Lower inflation would mean prices rising more slowly. It would not generally restore the prices Australians remember paying several years ago.

That distinction matters. A household can hear that inflation is improving while still finding its income insufficient to comfortably cover its bills.

The latest figures also show why the problem cannot be reduced to excessive discretionary shopping. Housing prices in the consumer price index rose 5.2 per cent over the year, while the transport category increased 8.7 per cent. These categories include costs central to getting to work and maintaining a household.

Families can postpone a holiday or replace a restaurant meal with home cooking. Their capacity to reduce essential spending is much more limited.

Governments help shape the playing field

It would be inaccurate to treat every interest rate decision as a verdict on the government of the day.

Australia imports global price pressures. Conflict, disrupted shipping and higher international energy prices can affect domestic costs regardless of decisions made in Canberra.

Private businesses and households also influence demand through investment, borrowing and spending.

Nevertheless, governments help determine how exposed the economy is to those pressures and how effectively it can respond.

Housing policy affects the supply of places to live. Infrastructure decisions influence transport costs and access to employment. Energy policy helps shape investment in generation, networks and reliability. Education and training affect the availability of skilled workers.

Population growth increases demand while also adding workers and productive capacity. Its economic effects depend partly on whether housing, infrastructure and services expand alongside it.

These responsibilities extend across federal, state and local governments, often across successive administrations.

The relevant question is whether their combined decisions have helped Australia produce enough of what its population needs.

Interest rates cannot build the missing capacity

Higher interest rates work partly by discouraging borrowing and spending.

Households with larger repayments have less money available for other purchases. Businesses may reconsider expansion. Demand weakens, reducing the scope for price increases.

But a higher mortgage repayment does not directly produce another home, improve an electricity network or train a tradesperson.

Indeed, higher financing costs can make some investment harder to undertake, including projects that would eventually expand supply.

That is a central difficulty in managing inflation: monetary policy can restrain demand more quickly than governments and businesses can repair longstanding capacity constraints.

It remains necessary to prevent inflation from becoming entrenched. Persistent inflation damages purchasing power, undermines planning and can ultimately require an even more painful response.

But monetary policy works within an economy whose underlying strengths and weaknesses have already been established.

Expecting the Reserve Bank to deliver price stability while other policies leave essential bottlenecks unresolved places a heavy burden on one instrument.

Government spending needs closer scrutiny

The fiscal debate also requires more precision than the claim that all government spending causes inflation.

Public expenditure can add demand when workers, materials and equipment are already stretched. Poorly timed or poorly targeted spending can make the Reserve Bank’s task harder.

Other expenditure can expand productive capacity.

A completed transport connection may improve access to jobs. Effective training can ease a skills shortage. Well-chosen infrastructure can reduce the time and expense involved in moving goods.

The distinction is between what spending consumes now and what it enables the economy to produce later.

Even useful projects can compete for scarce resources during construction. Their timing, sequencing and delivery therefore matter.

Governments should be judged on whether their spending produces measurable improvements in capacity and services, as well as on the size of their commitments.

The burden falls unevenly

An interest rate decision applies nationally. Its effects vary sharply.

A household carrying a large variable mortgage may face an immediate reduction in disposable income when its lender raises rates.

A mortgage-free household may experience little direct pressure from the same decision. Some savers may receive higher interest income, although inflation continues to erode purchasing power.

Businesses face a similarly uneven picture.

A retailer selling optional purchases may lose sales as customers redirect money towards repayments and essential bills. A business with debt can face higher financing costs at the same time.

Workers can then feel the effects through fewer shifts, delayed recruitment or reduced opportunities.

Renters also remain exposed to inflation and economic weakness. Their rents depend on local supply, demand and market conditions; higher borrowing costs do not automatically determine what a landlord can charge.

This uneven distribution helps explain why national economic commentary can sound detached from individual experience.

Some Australians still have considerable spending capacity. Others have already made substantial cuts.

A hold would not mean the pressure has ended

A rate increase would intensify scrutiny of economic management. An unchanged rate would still leave households and businesses operating under the existing settings.

A hold means the Reserve Bank has chosen to leave the cash rate where it is while assessing the outlook. It does not mean inflation has been defeated or that borrowing has become affordable.

The Bank’s September statement identified both international energy pressures and domestic capacity constraints. It also warned that weak productivity growth was limiting the economy’s potential growth.

Those are problems that extend beyond the next meeting.

Productivity ultimately concerns how effectively Australia turns its labour, investment and resources into goods and services. Improving it creates greater scope for higher living standards without continually running into inflationary limits.

That requires sustained work long after the interest rate headlines disappear.

The Times View

The RBA decision deserves attention because it has practical consequences for millions of Australians.

But the number should begin a wider examination of economic management.

Governments cannot control every international shock. They can be held accountable for the housing, infrastructure, energy and service systems through which those shocks reach Australians.

The test is whether policy is making essential needs easier to supply and the economy more capable of supporting rising living standards.

The cash rate is both a scoreboard and a tool used to change the result. Australians watching it this week are entitled to ask why so much of the adjustment keeps arriving in their household budgets—and what is being done to reduce the need for that adjustment in the years ahead.