When the Reserve Bank of Australia lifted its cash rate on Tuesday, with more rate rises in the pipeline, it did so ostensibly to combat an inflation rate swollen by petrol prices and gas bills, not by avaricious wage claims. Apart from a few beneficiaries, among them Pauline Hanson, the RBA’s move amounts to an act of pointless aggression against the majority of Australians.
An overheating economy is not the cause of the recent inflation spike. Its cause is a war of choice in the Gulf. Since US and Israeli bombs began falling on Iran, the strait of Hormuz has turned into a toll booth, shipping insurers have tripled their premiums, and tankers have been diverted around the Horn of Africa. In Australia, a tiny minority connected to the energy oligopoly raked in exorbitant profits while the vast majority felt the pain. The interest rate hike deepens the majority’s pain without delivering much gain.
There are two species of inflation, and central bankers have spent 40 years pretending there is only one. Demand-pull inflation occurs when households and firms spend more than the economy can produce: raise the price of money and you cool their ardour. Cost-push inflation is what happens when the price of an essential input is yanked upward by forces that have nothing to do with domestic demand: a war closing a shipping lane, a drought, a pandemic snarling supply chains. The price spiral now rattling through the Australian economy, courtesy of Donald Trump and Benjamin Netanyahu’s war on Iran, is cost-push to its marrow.
No plausible rise in the cash rate will open up the strait of Hormuz, or convince Gulf insurers to lower their premiums, or compel a barrel of Brent crude priced in a global market to come down because a Melbourne mortgage holder is stressed. What it will do is suppress Australians’ spending, wages, their ability to keep a roof over their heads, ultimately their economy’s capacity to invest and to produce. It is a little like treating a broken leg by amputating the healthy one.
In the meantime, the few beneficiaries of the war against Iran are laughing all the way to the bank. Australia is one of the largest exporters of liquefied natural gas on Earth, and roughly four-fifths of that gas is shipped out by foreign-owned companies, who then sell it back to Australian households at prices set by the same volatile international market that Iran’s war has set alight. Scandalously, as the Australia Institute has demonstrated time and again, they pay next to no tax. Against this backdrop, the rate increase is inexcusable: it is asking Australians to absorb a war-driven energy shock twice over, first as the owners of the resource receiving none of the windfall, and second as borrowers now paying a premium for mortgages that were never the cause of the price spike.
That managers and shareholders who are part of the process of raising prices, and profiting from it handsomely, do not feel the effects of monetary tightening is, on its own, indicative that the policy is ill-targeted. That its victims can only contribute to dampening inflation by ceasing to invest in production and in their future is outrageous. Slashing and burning housebuilding and investment today will inhibit inflation a little in the short-run at the price of diminishing long-term supply – a sure way to breed more long-term inflation. This is not an anti-inflation policy. It is a cynical transfer of income from people who did not cause the problem to people who are, in fact, profiting handsomely from it. And it is an excuse for further acts of vandalism on some of Australia’s important institutions.
A higher interest rate pushes up the government’s own debt-servicing bill, slows growth and shrinks the tax take, precisely the recipe that every finance ministry in the world then waves about as proof that spending “restraint” is unavoidable. Already, the RBA’s decision is being weaponised by those who have always sought to impose debilitating cuts to Medicare bulk-billing, aged care and to the national disability insurance scheme. And so the vandalism deepens.
I have watched this script performed time and again. In Britain after the bankers had sunk the economy in 2008; across the eurozone after German and French banks went bankrupt in 2009; in 2014 in Australia where, after a mining-investment slowdown, the Treasury went hunting for savings in health and welfare rather than in the diesel subsidies handed to miners or the private health insurance rebate.
The logic is always the same: never miss an opportunity to exploit a crisis that the majority had no hand in causing to deprive the majority of hard-won social protections and cherished institutions. A decade on, the targets have barely changed, only the alibi has: then it was the banking crises or the end of the resources boom, now it is Trump’s Iran war.
So, what should we do instead of wielding the blunt instrument of interest rates? A war-driven energy shock should be dealt with by means of export caps, which would help create strategic reserves that decouple Australian prices from Gulf geopolitics. Furthermore, price caps and a windfall levy on the gas cartel would fund targeted relief for the households and small businesses squeezed by the energy price hike.
None of that requires squeezing a single mortgage holder harder, and none of it requires a scalpel anywhere near public services. Raising interest rates to fight a war you are not fighting is bad economics. Using the bill for that war as the reason to make pensioners wait longer for a hip replacement would be something worse.
Australians did not vote for either. If the Labor government cannot see this, they stand no chance against a One Nation surging on the back of mounting discontent.
• Yanis Varoufakis is an economist, politician and author. His latest book is Raise Your Soul! A Personal History of Resistance
