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Are Interest Rate Rises The Best Way to Reduce Inflation?

I find it quite startling that no one in this country questions the prevailing theory that the best way – indeed the only way – to fight inflation is to increase everyone’s mortgage rates.

Everyone – including economists, politicians, journalists and the general public – seems to blindly accept, without question, that constantly lifting interest rates is the thing to do when inflation is high.

I think there’s a strong case that the conventional wisdom – if indeed it is wisdom – is questionable in the current circumstances and that Australian families are being slugged with massively higher dwelling costs for no good reason.

There are other, better, ways to deal with the key components of the current high inflation rate and that higher interest rates are not having the forecast effect.

To date we have had nine rapid-fire interest rate rises by a Reserve Bank which has panicked, after earlier getting it horribly wrong with their predictions about inflation and interest rates.

The official interest rate has risen from 0.1% to 3.35% at record speed, with homeowners paying 5% to 6% on their mortgages.

But there has been no visible impact on the rate of inflation, which continues to rise.

So what will the Reserve Bank do in response to the reality that lifting interest rates hasn’t brought down inflation? They will lift interest rates again.

Sadly, that’s all they have in their box of tricks. No Plan B, no alternative policy – just lift interest rates.

Reserve Bank Governor, the dismally untalented Philip Lowe, has no other ideas to offer.

What he’s doing fits that popular definition of insanity, doesn’t it? Insanity is defined as doing the same thing again and again, but expecting a different result, even though what you’re doing is clearly NOT working.

But an examination of the key elements causing the high inflation rate suggests strongly that higher interest rates will have little or no impact.

The official data shows that the key components of the high inflation rate are petrol prices, housing construction costs and the price of fruit and vegetable prices.

None of these situations has been caused by demand from Australian consumers spending wildly and pushing up prices.

They’ve all been caused by peculiar special circumstances beyond the influence of consumers.

High petrol prices are fundamentally being caused by the war in Ukraine. They’re up 16.6% in the past 12 months. Lifting the interest rates paid by Australian families won’t end the Russian invasion of Ukraine and it won’t reduce the price of petrol.

Rapidly rising costs in the home construction industry are the result of shortages of core materials and tradespeople, which is a product of the pandemic and the disruption to supply chains. Construction costs have soared – up 18% in 12 months – and lifting interest rates will likely make it worse, not better.

Food prices have risen because of shortages caused primarily by extreme weather events, as well as pandemic issues. Again, lifting interest rates won’t fix the food supply shortages and prices will remain high.

Clearly, there are measures that the Federal Government could take to address the shortages that are causing the prices of these key items to increase.

But our politicians appear to be as bereft of ideas as our economists are and they’re sitting back and leaving it to the Reserve Bank to deal with inflation.

But sadly, Philip Lowe and his gaggle of vision-impaired economists don’t have any ideas either.

They have just the one tool in their kit bag: lift interest rates, even though that measure does nothing to address the true causes of the high inflation rate we currently have.

And when that doesn’t work, they’ll go to their alternative strategy – which is, lift interest rates more.

It’s time this blinkered, simplistic and ineffective approach was challenged – and that we consider the possibility that perhaps there’s a better way.


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