The Liberals, the RBA, and the interest rate soap opera
The inflation figures are out, and it doesn’t look good for Howard Inc, with inflation numbers staying the course of the last few years. This quarter, it was at 1.9%, which is on the lower scale of past inflation figures. The trouble is, past inflation figures have led to rate rises, and unfortunately for our lovable Liberals, if the Reserve Bank wants to be consistent, an interest rate hike is close to a certainty. This is the peril in running a campaign based on a mechanism you have little control over. The RBA is embodied with powers that are separate from our politicians, and with good reason. Can you imagine the abuse that could occur, in situations just like this one? Using interest rates as a political tool is very dangerous. Hence why the current system stands; independent, highly experienced board members meet, talk about figures, and make a decision without having to worry about so much as a text message from Costello (although he probably has tried).
Costello makes one glaring mistake, at least from my eyes. He talks as if the sole goal of the reserve bank; yes, all those highly paid egg heads with mountains of experience, is to keep the inflation rate between 2-3 percent.
PETER COSTELLO: Well, as I said yesterday …take out volatile items, and the other statistical measures showed that inflation was towards the upper level of the band, around three per cent.
CHRIS UHLMANN: Forcing the Reserve Bank to move?
PETER COSTELLO: Well, I don’t think that’s the right understanding of monetary policy. The monetary policy which I have set with the Reserve Bank governor is to keep consumer price inflation between two and three per cent over the course of the cycle.
So why do we need a reserve bank then, Pete? All decision making on interest rate cuts or rises could be made automatically, using a simple equation. Surely a conservative government could recognise the need to cut the fat. Why do we even need an RBA? We have the treasurer setting targets, why the need for experienced men to talk about possible future financial conditions? What’s the point in debating various macro-economic scenarios, and how changes could effect all participants, as a whole? Of course, by talking this way, I sound like a moron, because the answer is pretty obvious. Especially to Mr Costello. There in lies his problem. He knows the truth, and he knows if the RBA makes the financially sensible move, his re-election chances take a huge hit. Politics and money rarely mix well.
