DIMITRI BURSHTEIN & PETER SWAN: Australians desperately want a rate cut. Here’s why they can’t have one

On Tuesday, there is no way that the RBA will reduce the cash rate. It should do the opposite and raise the rate. Given RBA dysfunction, the rate will most likely remain unchanged.

It should surprise no one that inflation is re-accelerating in Australia. What is surprising is the RBA’s insistence that it did not see it coming.

Milton Friedman settled this argument decades ago: inflation is “always and everywhere a monetary phenomenon”, emerging whenever money creation outstrips real output.

Output has been throttled by policy choices, but the RBA alone controls money supply — and its long-running push toward zero real interest rates, reinforced by excess liquidity, is undeniably driving today’s price pressures.

Despite Treasurer Jim Chalmers’ assurances, inflation is rising, not falling. ABS data shows that while inflation over the 12 months to October 2025 sat at 3.6 percent, the annualised rate for the September quarter was 5.2 percent.

With real interest rates once again negative, the RBA’s loose stance is enabling both resurgent inflation and broader economic distortions.

Since 2010, the RBA has relentlessly pushed the cash rate lower, eventually nearing zero. Real rates turned negative in 2013 and collapsed to minus 6.5 percent in 2022.

These ultra-low rates entrenched Australia’s chronic productivity malaise, stagnant now for more than a decade.

Deputy RBA governor Andrew Hauser recently claimed Australia is “boxed in” by capacity limits. In truth, such limits predictably arise from the RBA’s own distorted rate settings.

As Hayek warned in 1931, suppressed rates foster “malinvestment,” steering labour and capital into ventures that survive only under artificially easy conditions.

Australia is now living that warning. Years of zero real rates have produced waves of unproductive “zombie” firms absorbing workers and capital without generating growth.

Their persistence locks resources away from higher-value, higher-productivity uses. Even the RBA has noted the extraordinary collapse in insolvencies since 2020.

This is a textbook breakdown of Schumpeterian creative destruction — essential for renewal and dynamism. Government industry policies have only intensified the problem.

Cheap money has also bred moral hazard in Canberra. Whenever policy missteps choked supply or eroded productivity, the RBA intervened with rate cuts to dull the consequences.

Each cut let governments pretend that heavier regulation, rising spending, higher taxes, and sweeping interventions carried no economic cost.

Rather than protecting workers and savers, the RBA shielded politicians, providing an anaesthetic potent enough for ministers to insist all was well.

The most damaging consequence has been a vast intergenerational wealth transfer. Surging asset prices — especially housing — have shut younger Australians out, while governments embarked on borrowing binges.

The burden of this era of cheap money will fall not on those who indulged in it, but on those too young to have had any say.

Equally troubling is the RBA’s tolerance for higher inflation than its global peers. While the Federal Reserve, Bank of England, ECB, Bank of Japan, Swiss National Bank, and Bank of Canada all target 2 per cent, the RBA clings to a 2 to 3 per cent band — implicitly accepting an inflation rate at least 25 per cent above other advanced economies without meaningful justification.

A key driver of the RBA’s dovishness is its manufactured independence, compromised by structural entanglement with government. The treasury secretary — chief adviser to the treasurer — sits on the monetary policy board. No serious economy permits such an arrangement.

The treasurer also administers the RBA Act, meaning the treasury secretary oversees an institution in which she is a central decision-maker.

The recent amendment barring the treasurer from directing the secretary on monetary policy is symbolic theatre; a mafia boss does not need written orders. The power to appoint — and remove — is message enough.

Since being granted nominal independence in 1996, the RBA has also drifted into political commentary, far beyond its remit. The governor’s role as a backdrop prop at Treasurer Chalmers’ productivity summit epitomises this drift.

Australia’s inflation problem is no enigma. It is an RBA-engineered malfunction — amplified by distortionary policies, shielded by a façade of independence, and magnified by political inertia.

With inflation rising and real rates negative, Tuesday’s RBA board meeting must deliver a rate increase to avert a more damaging breakout.

Such a move would not please borrowers ahead of Christmas, but an inflation surge would be far worse, hurting all Australians — especially low-income households.

After a decade of zero or negative real rates, a rise would finally reward savers. And perhaps a decisive move will jolt the Government out of its fiscal and reform paralysis.

A difficult decision now is the only way to avoid disaster later.

Dimitri Burshtein is a senior director at Eminence Advisory. Peter Swan is professor of finance at the UNSW-Sydney Business School