Two reasons why the RBA will have to raise rates again, and soon

The data are clear that the disinflation process stalled at the end of last year. These are the latest six-month inflation numbers since December: 4.1, 4.1, 3.9, 4.1, 4.2, 4.1. The goal is to get down to 2.5. At best, we are going sideways.

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In Australia today, interest rates are lower than in peer countries and inflation is higher. This is no coincidence. The RBA thought they could do less and simply achieve a shallower glide path. But this plan has failed. So rates will resume their rise – at a time when they are falling elsewhere.

This brings us to the second driver. On Monday of this week, the federal government began pumping about $43 billion in further stimulus into the economy, in addition to the tens of billions pumped in by states. The scale of fiscal recklessness is unprecedented in my lifetime – at least given the context.

Decisions the federal government made in its last two budgets increased the deficit in the financial year that started on Monday by $20 billion. Together with the $23 billion phase 3 tax cuts, they turned a $15 billion surplus into a $28 billion deficit.

While the RBA is trying – very gently – to ease its foot on the brake, Australia’s governments are pushing the accelerator. This leaves the RBA with little choice but to press harder so we don’t hit the wall.

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And we shouldn’t be so naive as to think that the two simply cancel out. Indeed, pushed to the limit, either the brakes burn or the engine explodes. I have no doubt that we would be in a better place as a nation if both parties had simply been more restrained. If we are eventually forced into recession, this will be the reason.

Now, some have argued that we should just give up. If a recession is the price we have to pay to keep inflation under control, then it is a price not worth paying.

Besides being clearly wrong (don’t cry for me, Argentina!), this is naive. The ultimate objective of the RBA is price stability. inflation WILL return to target. The question is not if it will happen, but what it will take to achieve it. If a recession is what is needed to make up for the mistakes of the past, that is exactly what the RBA will do.

And those of us who have called for the RBA to do more and the government to do less over the past two years were trying to avoid this very eventuality. Those who advocated a fraudulent policy in the name of protecting the most vulnerable have, in fact, put them at greater risk.

If we have a recession, it will be on their heads.

Steven Hamilton is Assistant Professor of Economics at George Washington University and Visiting Fellow at the Tax and Transfer Policy Institute at ANU.