An interest rate rise would be the wrong move, by the wrong institution, for the wrong reason

The first is that economists in central banks adhere to a fairly rigid set of equations which form the foundations of their discipline.

The second is that governments over the past 30 years have given ever greater tax cuts, subsidies and concessions to business and high-income earners, while at the same time making life more difficult for the middle.

Inflation has gone up sharply in the US, and also gone up in Australia, New Zealand, Canada and many European countries. The inflation beast has to be curbed, the economists warn. Money has to be taken out of the economy to dampen demand for goods and services, because high demand causes prices to rise, their equations show.

You can take money out of the economy in two ways: by raising interest rates (monetary policy), or by raising taxes (fiscal policy). Central banks, like our Reserve Bank, do the former; governments do the latter.

However, there are recession-threatening reasons against raising interest rates right now. First, recent price rises have been caused more by supply shortages, due to the effects of COVID, than by overall pent-up demand.

For example, when you cannot get a new car, you go for a high-end second-hand car, and the prices skyrocket. But when supply chains improve, that artificial demand will fall away. The latest inflation figures suggest that prices have gone up mostly for imported goods that reasonably well-off people can afford to pay more for, and not for lots of everyday goods usually bought by the less well-off.

So, the "inflation" is not being caused by lots of ordinary people having more money in their pockets through higher wages. And, therefore, it does not need higher interest rates to dampen it. Indeed, higher interest rates will not do much to dampen demand for scarce goods that people on good incomes "must have".

Higher interest rates will also have some terrible consequences. The trouble with raising interest rates is that they rise equally for everyone - for people in clover and for people struggling.

Higher interest rates are not going to neatly take the heat out of the rising prices of a few scarce items. Rather, they will dampen demand across the board, and that will include, of course, goods and services produced by local businesses who are struggling to stay afloat.

Further, the higher interest rates will tip some people into fire sales or bankruptcy, especially people who have recently taken on huge mortgage debt. It will do this because the interest rate rise was not imposed because of rising wages; there have been none. If that happens, of course, it will make housing inequality worse. Some first home buyers will not keep their homes, and investors will be ready to scoop them up.

However, in Australia, we might get lucky. Reserve Bank governor Philip Lowe has indicated that he will be patient. He has also bemoaned the fact that wage growth has been flat. So, the Reserve might hold off on interest rises for as long as possible, despite markets predicting there will be four 0.25 per cent rises this year.

Other countries might not be so lucky.

Lowe is far too astute to say this, but you can put "flat wages growth" other ways: the government siding with big business and employers generally to casualise as much of the workforce as possible, resist pay increases, and import as much cheap labour as it can get away with, etc.

The big trouble here is that governments over three decades have created a dual economy. One tier comprises people (many of them young) living hand-to-mouth with no savings, at the mercy of rent increases by landlords, with no sick pay or, indeed, any security of employment. The other tier comprises people in secure employment (or who have had decades of it) who own their own home outright or with a manageable mortgage, have some savings and investments and can fall back on superannuation.

Interest-rate rises will hit the former harder, even if they have no mortgage payments directly affected. This is because landlords will try to raise rents to make up for higher interest rates.

So, for the next year or so, increasing interest rates would be the wrong move, by the wrong institution, for the wrong reason.

The better policy would be not to use the sledgehammer of monetary policy at all, but rather for the government to do its job with fiscal policy, which can be applied in a much more nuanced way.

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Present policies (ever more tax cuts) are making things worse. Wealthy people will save and invest that money, not spend it in ways that will help the economy by stimulating demand. The government should be pulling in more revenue from high-income people, not less, and they should be directing it at low- and middle-income earners so that they have more disposable income to spend in the economy.

While governments persist with policies that increase inequality and promote a two-tier economy, they will emasculate the capacity of central banks to use monetary policy to iron out the peaks and troughs in the economy through the business cycle. While we have a two-tier economy, the imposition of higher interest rates will always threaten recession.

Lowe has made many statements in the past few years urging for wages growth to push inflation to within the target range, so the economy grows and living standards improve steadily. In a way, those statements were calls on the government to do its job with fiscal policy, because a central bank is in no position to do anything about wages growth.

Government policies which result in the rich getting ever richer, and inequality getting ever greater, ultimately will impoverish us all.

But this will not change while big corporate donors finance the major parties in utterly opaque ways, as this week's Centre for Public Integrity report showed yet again.

For the corporates, the donations are small beer for huge returns in favourable policies; for the major parties, the donations have become an opiate; for the public, they have corrupted the way we are governed.

And yet again we will go into the coming election with no idea which corporations have given to which political parties until nine months after the event.

Indeed, the coming election should be more about integrity in government than anything else.