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MNI INTERVIEW: Gov'ts Fuelling Inflation- Ex RBA Board Member

(MNI) Melbourne

Australian state and federal governments must do more to constrain inflation, such as by pulling back capital investment plans, increasing taxes and lowering immigration, otherwise the Reserve Bank of Australia may have to hike the cash rate above 5%, a former board member has told MNI.

Warwick McKibbin, now Australian National University economics professor and an RBA board member between 2001-2011, said in an interview that the impact of higher rates on the economy was distributed unevenly, and that a large influx of immigrants had added to demand while government capital spending had increased about 8%.

“The real economy is growing strongly in terms of the drivers of demand," he said. “If underlying real growth in demand is sitting about 3% and the inflation target is 2-3%, then the neutral interest rate should be about 5.5-6% in nominal terms,” he noted.

In July, McKibben suggested the RBA should pause cash-rate hikes to observe their impact on Australia's largely variable-rate mortgage market. (See MNI INTERVIEW: RBA Should Pause Rate Hikes - Ex-Board McKibbin). The Reserve subsequently held at 4.1% until its November meeting, when it hiked the cash rate 25bp to 4.35%.

McKibben noted Australia’s economy was more sensitive to interest rates than peer countries that continued to hike throughout the year. However, the strength of immigration had surprised both the RBA and independent economists, while overall demand had failed to fall fast enough, he added.

“My reaction to that is fiscal policy and if the government isn’t doing that then the Reserve must keep marching towards 5%,” McKibbin argued.

MNI reported this week that the RBA’s latest November Statement on Monetary Policy embedded a stronger rates profile than that implied in August. (See MNI POLICY: RBA's Fresh Forecasts Embed Strong Rates Profile) The minutes of November’s board meeting also showed staff had predicated their updated forecasts – which pushed the return of inflation back to the top of the 2-3% target six months to December 2025 – on a potential one or two increases.


McKibbin noted immigration had benefitted Australia and would continue to do so over the longer term, but argued levels should reflect constraints and the government should prioritise workers who alleviate supply shortages.

“The treasurer must sit down with a very clear plan on what the problem is and how to fix it in a way that doesn’t reduce supply or increase demand, as this would make the situation worse,” he added. “I think there's a contradiction in many of the government’s policies at the moment.”

He noted the government could also increase taxes on goods and services or income to lower demand alongside cuts to spending. "If you don't do any of those things, then the RBA’s mandate is to raise interest rates, which is not a great way of dealing with inflation, but it’s all we have left,” he noted. Real interest rates were still low compared to CPI, he continued. "Most other countries that are getting inflation down have interest rates much higher. It's not really rocket science.”

Daniel covers the Reserve Bank of Australia and the Reserve Bank of New Zealand and leads the Asia-Pacific team.
Daniel covers the Reserve Bank of Australia and the Reserve Bank of New Zealand and leads the Asia-Pacific team.

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