The RBA continues its Ideological Sabotage of Prosperity
Why monetary policy must serve society, not the financial sector
The Reserve Bank of Australia has once again increased interest rates in a misguided attempt to hit an inflation target of 2-3%. I see this narrow focus on inflation as deeply flawed. Some price stability is desirable, but what matters most is achieving and sustaining full employment.
The RBA's rate hike will unnecessarily slow Australia's recovery from the COVID-19 recession. With underutilisation still too high, and the economy not yet out of the woods, we need policy support for spending and job creation, not a tightening of policy that will weaken demand. The key drivers of recent price rises are supply-side problems like higher commodity prices that higher interest rates cannot fix. We need not crash the economy to deal with supply shocks outside of the RBA's control. The far greater concern should be nurturing the recovery and delivering policies that will reduce unemployment, underemployment, and increase real wages growth for workers who have endured falling or stagnant living standards for too long.
The RBA imagines expectations of higher inflation or a wage-price spiral are forming, but this is baseless given weak bargaining power and low wage growth over the longer-term. Workers have little leverage to gain significant pay increases, and wages are not driving inflation. Interest rate hikes will just squeeze household budgets further and slow the economy, making life even more difficult for those doing it tough. It is not the role of the RBA to restrain incomes or weaken job security to satisfy its ill-conceived inflation target.
The RBA's decisions also work against the government's fiscal policy, which has provided essential support for the recovery. With both monetary and fiscal policy influencing the economy, coordination towards the shared goals of growth and jobs is needed, not policy operating at cross purposes. The Recovery will falter if one arm of policy is effectively neutralizing the other.
The RBA must refocus on sustaining full employment and inclusive growth, not undermining it due to an excessive fear of inflation. Only once the economy is operating at full capacity, with unemployment near historic lows and real wages growth re-established, should inflationary pressures become a significant concern. For now, nurturing the recovery should be the priority, not obsessing over inflation targets. Otherwise it’s effectively class war.
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