Don Stammer has a good article in The Oz today explaining why the RBA needs to do its job:
"Though investors have largely been on the sidelines while these shrill words have been thrown at the bank, they have a lot at stake. Global experience shows that once inflation gets going, a momentum builds up that is hard to contain and reverse. We learned in the 1970s and 80s how inflation damages the economy, creates arbitrary redistribution of income and wealth, and shortens investment horizons.
Increases in interest rates certainly create problems for borrowers, especially where the borrowings are on variable interest rate terms. But there's no easy way out: if inflation takes hold, borrowers are likely to suffer even more from the subsequent ratcheting up in interest rates.
Higher interest rates are always seen as a "blunt" way to fight inflation. Of course, monetary policy should not attempt to prevent or reverse the first round increases in prices that result from cyclones, higher prices for petrol or increases in indirect taxes. Its aim should be to limit the consequences of these price increases; that is, to prevent an inflationary spiral developing. And that's a challenge, especially in times like these when productivity isn't growing."
