Employer and business groups have expressed displeasure verging on indignation that the Reserve Bank put interest rates up a quarter of one percent yesterday. They fear that the extra costs come at a bad time in the face of the costs of the introduction of the GST and the costs of dealing with the Y2K bug. Maybe so, but it is far better that business and individual borrowers cop a small rate increase now, rather than a bigger one later.
The Reserve Bank’s timing is perfect. It sends a small psychological shock to both business and domestic consumers that is far more important than the small increase itself. The shock comes just before people begin thinking about Christmas spending. The messages the Reserve has sent are: interest rates do not fall indefinitely. There could be another one. Be careful in spending and investment decisions. Be careful in dealing with wage increases and price increases.
Business thinks that the economy has changed so much that the bank could be more carefree. Business wanted the bank to let business growth go because, its spokespeople argued, we could have greater growth without inflationary pressure. This sentiment is a mixture of short-term greed and short-memory economics.
The bank does not deliberately set out to put a ceiling on economic growth. To the contrary it wants to achieve the best sustained long-term growth possible. It would have been quite foolish for the bank to ignore the beginnings of inflationary signs, especially the trade figures.
Business should be grateful at the bank’s intelligent approach. Its new approach comes with greater independence from government and the Treasury — both direct and indirect. The new approach contains two elements: early intervention and incremental intervention. In the words of the Reserve Bank governor Ian Macfarlane, it is a pre-emptive strategy.
In the past the bank has had to be mindful of government attitude. It had therefore had to wait until inflationary pressure was more demonstrable provable. Now it is more independent it can intervene earlier. An if it can intervene pre-emptively, it does not have to be so heavy-handed.
The trouble with acting too late, is that the action has to be more drastic. Once the elements of inflationary pressure have mounted in the economy it is much harder to hose them down without larger interest rate rises.
Business finds it harder to deal with large single interest rate rises. It affects cash flow more profoundly and can even threaten the existence of some businesses.
The aim of monetary policy is to maintain price stability — to hold inflation. But that is not an end in itself. It is also directed a levelling out cyclical fluctuations in the economy with the aim of maximising employment.
The bank was right to move when it did and in the way it did. Much easier to adjust to a small early rate rise than revisit the horrors of the recession we had to have — a recession we did not have to have if the Reserve Bank had been able to act earlier.
A policy of let her rip would have been highly irresponsible.
And briefly . . . The chair of the Australian Broadcasting Authority Professor David Flint was foolish to go on the John Laws show to rebut a statement on the republic made earlier on the program by former Prime Minister Bob Hawke. A simple press statement would have done the job.