OPINION: The Reserve Bank will have to go much harder to rein in inflation.
The Reserve Bank of Australia’s nine-month campaign to rein in inflation is only just touching the sides.
We need to think about monetary policy in terms of real interest rates, not the nominal cash rate. And that story goes back a long way. The RBA, with a policy rate of 0.1 per cent rate in October 2021, communicated that the “condition [for a rate rise] will not be met until 2024”. Research firm EY Sweeney recently conducted focus groups as part of the review of the RBA and found that some lower income earners were feeling marginalised. Those in lower income brackets noted their financial hardship through the cost of housing, whether it be building a new home, entering the property market, servicing a mortgage or paying rent.
The most effective and lasting solution to assist lower income earners is to bring nominal prices down. The most effective and lasting solution to assist lower income earners is to bring nominal prices down.The RBA must ensure that real rates become positive. This can only happen if nominal interest rates are higher than inflation, which means either inflation must fall, or interest rates pushed up. Both will probably happen gradually as the year progresses.
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