The Flawed System of Interest Rate Manipulation to Control Inflation

So the Reserve Bank put interest rates up again last week. With 6 rate rises in the last year, the cash rate has climbed to 4.75%. Why?

Glen Stevens, the Reserve Bank Governor, said they decided to raise rates because of “concerns about the possibility of a larger than expected slowing in Chinese growth have lessened recently and most commodity prices have firmed, after a fall earlier in the year”.

Right, so the mining industry is making more money, becoming richer and more powerful, so it only makes sense that Joe Bloggs from Melton should pay more interest on his home loan? Until he can no more and loses his home that is. After raising rates higher than the Reserve last week, CBA Chief Executive, Ralph Norris said it was better to see “a few” foreclosures than have an economy hamstrung by a low-profit banking system. At least Joe Bloggs from Melton will know, when he’s living in a box at Flinders Street Station, it’s for the good of the economy…

I understand that the Reserve Banks job is to take control of inflation; of course they would want to, the higher the inflation, the lower the value of each of those pieces of paper they print… I know there are other reasons as well, real reasons, worthwhile reasons, but there must be some other way.

This would be a great part of this blog to explain my solution… but I don’t have one. All I know is that the current system is flawed and needs to be fixed. Punishing the average Aussie for a profit that a company makes on the other side of the country is not the way. We have a two speed economy; we need a two speed solution. This is where governments should earn their keep (and opposition parties). Interest rate manipulation hasn’t/won’t work, let’s think of something else that will.

Leave a Reply

Your email address will not be published. Required fields are marked *