The Reserve Bank is increasingly likely to start raising interest rates next Tuesday. But why would it add increased interest costs to household budgets at a time when Australians are struggling with a surging cost of living? Michael Janda explains the economics behind it.
In turn, that means businesses will face even higher costs and, if demand is strong for their products, they will be able to pass those costs on to their customers through higher prices still.At extreme levels, this is very destabilising for an economy.
Inflation has never been that high in Australia, but it was much higher in the 1970s and 80s than it has been since, and those levels of price rises were seen to be hurting economic growth.That's why in the early 1990s the Reserve Bank joined other major central banks in setting a specific inflation target — interestingly, a trend started by the Reserve Bank of New Zealand.
One reason to act immediately is the "stitch in time saves nine" argument, i.e. if you address a problem now it stops it getting worse and the solution being more painful, like a higher peak in interest rates if the RBA delays too long.
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