‘Impoverishing millions’: Richard Denniss says the RBA needs to rethink how it fights inflation

The Reserve Bank is being urged to stop using interest rates as the primary lever to lower inflation, with Australia Institute co-CEO Richard Denniss arguing “impoverishing millions” isn’t the only option available to the government.

The RBA is due to meet next week after leaving the official cash rate unchanged at 4.35 per cent in June, following a fall in inflation to 3.5 per cent from 4.0 per cent.

Economists are split on whether the rate hike cycle is over, with the RBA noting last month that “headline and underlying inflation are still too high”.

Speaking on his podcast What’s the Point, Dr Denniss said over the past 30 years, the RBA has convinced itself and Canberra that using interest rates was the best way to address inflation.

“Inflation is the rate at which the stuff we buy is going up in price,” he said.

“If petrol used to cost a dollar and then it went up to $1.10, we’ve had a 10 per cent inflation in the price of petrol … and one of the Reserve Bank’s jobs is to try to control inflation.”

A longstanding objective of the RBA is to achieve full employment, though critics argue the bank has redefined what that means.

Dr Denniss said rather than focusing on getting as many Australians into work as possible, the RBA defines full employment as the lowest unemployment rate that can be sustained without pushing inflation higher.

“The rhetorical trick is to ignore how many unemployed people there are when you’re measuring unemployment, to focus on the non-accelerating inflation rate of unemployment,” said Dr Denniss. “It is that ridiculous.”

“As an economist, I’d rather pursue full employment directly and simultaneously try to control inflation.”

The thinking behind the strategy is if unemployment gets too low, businesses have to offer higher wages to attract workers.

To cover those higher salaries, they may increase their prices, which can lead to a rise in inflation.

The prominent economist argued the central bank was so focused on reducing inflation now that it’s “actually happy to cause some unemployment”.

“When we increase interest rates, we impoverish millions of people, when we lower consumer spending, we know that shops are going to lay off staff,” he said.

“The whole point of increasing official interest rates is to make our mortgage repayments bigger, to make our lives harder, to make our household budgets more strained so that we spend less money on other things.”

However, he warned the method unfairly and disproportionately shifts the burden onto one group.

“The problem with the Reserve Bank’s determination to focus on using interest rates is that it really loads up all of the pain on the subset, the section of the society that’s got a mortgage at that point in time,” he said.

Australia is broadly divided into thirds: around one-third of people have a mortgage, one-third rent, and one-third own their home outright.

The prominent economist said Canberra had several tools to reduce inflation, including tax policy, government spending and bank regulation.

“And sometimes, and we shouldn’t do this for everything, but sometimes we can literally control prices,” he said.

“We can say, ‘no, we won’t let that price go up so much’.”

He pointed to the Albanese government’s decision to cut the fuel excise in response to the ongoing conflict in the Middle East.

“By cutting the amount of tax we pay on petrol, the price of petrol fell. That means inflation fell.”

Dr Denniss said the government had also exercised control over increases in childcare costs and health insurance premiums.

He argued another option for the government would be to change the Reserve Bank Act, which “believe it or not … doesn’t actually mention inflation”.

“The Reserve Bank has convinced itself and convinced government and convinced most people in Australia that the way you pursue full employment is by pursuing low inflation,” he said.

“If that’s really true, I’d say we should just change the Reserve Bank Act and say their job is to pursue low inflation.”

However, Dr Denniss said successive governments had avoided changing the Act to prioritise inflation over full employment.

“I think that speaks volumes because the government, any government knows if they had to explain that to the public in the way I’ve just tried, no one would believe it,” he said.