Why do governments use interest rates to control inflation?
They are a blunt, unfair tool, taking money from those who can least afford it and giving it to those who probably don’t need more.
The aim of higher rates is to slow down spending on goods and services by cutting buyer demand, but the extra money paid by mortgaged home owners when rates rise doesn’t disappear.
It’s simply transferred to savers and investors in the form of higher interest on savings, bonds and debentures and bigger dividends to bank shareholders.
Governments used to control inflation in much fairer ways.
The most obvious ways to control inflation would be to cut government spending, increase taxes or introduce new ones, especially on luxury items.
It’s what governments did many years ago, when everyone played their part. But now one third of our households (those in debt) are being asked to pay the price of cutting inflation, while another third (those with savings) profit.
The reason that the government, will not take such steps is simply because cutting government expenditure or increasing taxation, even temporarily, would be politically unpopular.
Relying only on higher interest rates deflects the blame onto the RBA.
Higher interest rates may slow down spending, but it’s unfair to make heavily mortgaged first home owners pay the entire price while savers and shareholders receive a windfall.
If controlling inflation is so crucial to our economic welfare, surely everyone should contribute, not just those who can least afford it.
About John Lindeman John Lindeman has well over a decade of experience researching the nature and dynamics of various types of assets at major data analysts and is a leading property market researcher, author and commentator. For more information visit Lindeman Reports.
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