Why interest rate hikes won’t address ‘many of the causes’ of inflation

An independent economist says interest rate hikes don’t directly address many of the causes of inflation we’re seeing in Australia at the moment.

Inflation on non-discretionary items such as fuel, power and food rose by 6.6 per cent in the year to March.

Economist and vice-chancellor fellow at the University of Tasmania, Saul Eslake, says “raising interest rates isn’t going to make petrol prices go down, it isn’t going to end the war in Ukraine and help food prices reverse, it isn’t going to fix broken supply chains”.

And he says the savings pocketed by many Australians during lockdowns make it more difficult to use higher interest rates as a tool to drive down inflation.

“The way in which tighter monetary policy — that is higher interest rates — is meant to work is by weakening demand for the broad range of consumer goods and services so that businesses find it harder to pass on the cost increases they’re experiencing in the form of higher prices to consumers, and in the end, one of the reasons why prices are rising is because consumer demand is actually quite strong,” he told Tom Elliott.

“Not every household is in a position where they can absorb price increases, but a lot of households actually are, and the household saving rate has been at record levels since the onset of COVID.”

Press PLAY below to hear more about the current inflation situation