Reserve Bank of Australia inflicts rate pain now to prevent greater hurt

At least, that's what he told the Standing Committee on Economics when asked on Friday.

But it is very clear from his four-and-a-half hours of testimony before two parliamentary committees this week that he is worried about the risk that the longer inflation stays up, the more likely it is to become ingrained in people's expectations and the harder and more costly it will be to bring it down.

The governor sees no sign of that happening yet, but if he seems in a hurry to bring inflation lower, that is because he is.

The Reserve Bank board has raised rates at every meeting it has had since last May.

The size of the increases has come down recently from 0.5 to 0.25 of a percentage point a month.

Dr Lowe revealed yesterday that the smaller increments are part of a deliberate strategy by the central bank to keep interest rates at the front of people's minds.

Rather than tightening monetary policy in one big hit, the RBA thinks that smaller, more frequent monthly increases serve to remind people of the inflation threat and reinforce the message that the central bank is determined to bring it down, whatever the pain caused in the short-term.

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This is the overriding message the governor wants Australians to get from his two appearances this week.

"If we don't get on top of inflation and bring it down in a timely way, the end result will be even higher interest rates and more unemployment in the future," Dr Lowe warned.

The governor is clear-eyed that his position, and that of the Reserve Bank, is the focus of much of the anger and frustration being felt as rising interest rates and soaring living costs cause increasing hardship for millions, particularly among those with mortgages.

But if the Reserve Bank succeeds in bringing inflation down before it becomes entrenched in price and wage expectations, the governor is likely to consider the opprobrium worth it.

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