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Economist Christian Baylis says the Reserve Bank of Australia is relying on interest rate rises to control demand, leaving mortgage holders with higher repayments and less disposable income. He argues that the government should instead improve economic supply by reducing its footprint, running budget surpluses and addressing factors such as infrastructure, business investment, oil prices and productivity.
Economist calls on government to boost productivity as mortgage holders bear brunt of RBA’s cash rate riseMortgage holders are being hit with higher repayments in the fight against inflation, but many of the forces driving prices have little to do with how much households are spending.
, its highest level in 15 years. Know the news with the 7NEWS app: Government spending, higher oil prices, and booming investment in areas such as data centres are among the factors contributing to demand and putting pressure on the economy. Dr Christian Baylis, founder of Fort Lake Asset Management, told Sunrise the real problem is a lack of supply relative to demand.
The RBA cannot build more roads, increase business investment or make companies more productive, but what it can do is make borrowing more expensive, reducing the amount households and businesses spend.
“The RBA has to effectively try to temper the demand because it can’t do anything about the supply side of the economy,” Baylis said. Higher repayments leave households with less disposable income, which reduces spending across the economy and, in theory, takes pressure off prices. But for households already cutting back to afford their mortgages, another rate rise does not increase the supply of anything or produce more oil, build more infrastructure or make businesses more productive.
Baylis argued governments therefore need to do more to address the supply side, rather than leaving the RBA to suppress demand through higher interest rates. Baylis said governments should reduce their overall footprint in the economy, arguing they should be running surpluses rather than deficits while inflation remains elevated.
“At this stage of the economy, with the sorts of issues that we have as an economy, the government should be running $30 billion surpluses, not $30 billion deficits,” he said. He argued that would take pressure off the economy and give the RBA more room to keep interest rates lower. That could include incentives for businesses to invest in new equipment, reducing red tape, and building infrastructure that makes it easier for people and businesses to work.
Interest rates remain one of the RBA’s main tools for controlling demand and inflation but monetary policy can only address one side of the equation. Economist Dr Christian Baylis has called on the government to boost productivity to counter rising inflation. If Australia’s productive capacity is not keeping pace with demand, reducing spending through higher borrowing costs is one way to restore balance. The alternative is to increase the economy’s capacity to produce by boosting investment and infrastructure.
Rather than simply making customers buy fewer croissants, improving the baker’s equipment could allow them to produce more.
“If you can reduce red tape, you can reduce green tape. All of these things allow businesses to produce the goods and services in the economy at a speed that would be consistent with the demand that will ultimately bring inflation down,” Baylis said.
Reserve Bank Of Australia Interest Rates Mortgage Repayments Economic Productivity Budget Surplus
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