Why Higher Interest Rates Constitute Class Warfare: The Myth of Central Bank Independence
The Impact of Contractionary Monetary Policy
While the Reserve Bank of Australia (RBA) claims to raise interest rates to keep inflation low and stable, this policy choice disproportionately harms working people and constitutes a form of class warfare.
The RBA recently raised its cash rate by 25 basis points to 3.85%, surprising most economists and marking the 11th increase since last May. This move brings the cumulative increase to 3.75 percentage points.
RBA Governor Phil Lowe acknowledged in a statement that despite reaching its highest point at 7%, inflation in Australia continues to be considerably high and necessitates a period of time to return to the intended target range:
“Inflation in Australia has passed its peak, but at 7% is still too high and it will be some time yet before it is back in the target range. Given the importance of returning inflation to target within a reasonable timeframe, the board judged that a further increase in interest rates was warranted today.”
Previously, RBA Governor Phil Lowe said in a recent address to the National Press Club:
“Consumption growth has slowed considerably from the very fast rates during the COVID bounce-back and it is now below average. Looking forward, we expect that consumption growth will remain subdued for some time.”
Such policies demand working people bear the brunt of economic adjustments, even as:
“The cost-of-living pressures are squeezing household budgets across the country.”
Treasurer Jim Chalmers acknowledged that this decision has significant consequences for Australians calling it “a really difficult decision for a lot of Australians who are already under the pump”. However, he stated that inflation remains the primary challenge in the Australian economy and that his upcoming budget would prioritise responsible cost of living relief without exacerbating inflation.
Contractionary monetary policy:
Slows economic growth
Raises unemployment
Depresses wages
Undermines the financial security of households and labour’s bargaining power.
The Need for a More Inclusive Policy Approach
Although stable prices are an important policy aim, fighting inflation should not come at the cost of full employment, rising living standards, and equitable distribution of resources.
The RBA should not pursue an inflation-targeting regime that demands working people bear the brunt of economic adjustments, especially when, as Governor Lowe mentioned during his address to the National Press Club, “cost-of-living pressures are squeezing household budgets across the country.”
Monetary policy should:
Not be designed to benefit rentiers at the expense of labour
Not consolidate wealth and power at the cost of the general welfare
Abandon the inflation-targeting framework in favour of an inclusive policy approach focused on full employment, poverty reduction, and broad-based prosperity
Higher interest rates constitute class warfare, not an economic necessity, and the notion of an independent technocratic central bank is a myth that obscures the political nature of the RBA’s policy choices.
A Modern Interpretation of Inflation
and Interest Rates
Inflation is not solely the result of excess demand and cannot be controlled through interest rate policy alone. Instead, inflation can stem from supply-side factors like input shortages, firms’ pricing power, and global supply chain dynamics. According to Modern Monetary Theory (MMT), the price level changes with prices paid by the state when it spends, while changes in interest rates alter the term structure of prices.
The RBA’s inflation-targeting regime and the decision to raise interest rates constitute a sizeable policy failure that unnecessarily slows the economy and increases financial insecurity for households.
Contractionary monetary policy is not required to control inflation, especially when it stems from supply-side factors outside the government’s control. The central bank has ample room to keep interest rates low and support economic growth, full employment, and rising living standards.
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