Michelle Bullock’s announcement to lift the cash rate to 4.85 per cent puts a familiar question back onto the table. How much of Australia’s inflation can higher interest rates fix, and who pays for the attempt? And why hasn’t the Reserve Bank got the people in there who can think outside the box and look at creative solutions? Why have they got too many “gronks”?
Mortgage repayments rise long before the full effects of monetary policy work their way through the economy. In the meantime, households cut back, businesses lose customers and workers can lose hours and even their jobs. The squeeze lands unevenly, with some savers earning more interest while heavily indebted households pare back spending on essentials.
An RBA rate rise can cool demand, but it can do little directly about disrupted fuel supplies, a shortage of building materials or weak competition. And why raise the rates when the economy is slowing and unemployment is rising? It also puts responsibility back on the federal government. Energy efficiency can lower power bills, housing investment can ease shortages, and stronger competition policy can curb the pricing power of dominant firms. Australia’s responses to the global financial crisis and COVID showed how governments and the central bank can use different tools to pursue a common goal.
Treasurer Jim Chalmers has changed the board’s structure, but how much room is there to challenge the prevailing thinking? When the Reserve Bank reaches for the jackhammer, the question for Canberra is what it’s doing about the problems that higher interest rates leave behind.
