Reject monetary populism

Ordinary Australians are struggling under the dual pressures of high inflation and rising interest rates. There’s no easy solution, though there are some commentators out there offering simplistic and dangerous suggestions that will make the problem worse.

The hard-left Australia Institute has railed against the Reserve Bank of Australia (RBA) for their recent spate of interest rate increases. The RBA makes for an easy target. Bankers are never sympathetic figures, and the complex machinations of central bankers often looks like callous voodoo. The RBA has certainly made mistakes, but the crucial issue of the day is whether they should be increasing interest rates to get inflation under control or keeping interest rates artificially low in a futile attempt to perpetually boost the economy. The answer isn’t pretty for home owners (myself included) but the only responsible course of action is to increase interest rates until we get inflation back under control.

The call for low interest rates rests on two mistakes. First, there is a misguided belief that low interest rates are an effective way of boosting the economy. This is true in the short-term, but the stimulus soon wears off, leaving behind economic stagnation and ballooning debt. The only way to sustainably boost the economy is through productivity reform, which is out of the hands of the RBA. Second, advocates for ongoing low interest rates underestimate the serious damage being done by high inflation. It is absolutely essential for the government to get inflation under control as quickly as possible, and the only way to achieve that goal is by giving up the addiction to cheap money.

To their credit, so far the government has rejected the simplistic populism of throwing the RBA under the bus and clamouring for more monetary handouts. In an age of political short-sightedness, we should pause to applaud any government that’s willing to look past the cheap outrage theatre. Let’s hope they can keep their nerve.