What the RBA – still – doesn’t understand

The Reserve Bank chief, Glenn Stevens, is sanguine about the prospect of further rate rises.

Speaking at a seminar yesterday, Mr Stevens noted that Australia’s banks might raise their home loan interest rates even further, to recoup the higher borrowing costs they now face, as a result of the US credit crunch.

But he appeared comfortable and relaxed about this, saying simply “that’s life.”

That comment, coming immediately after 12 official rate rises – and some stiff unofficial ones as well – won’t endear Mr Stevens to young families, with big mortgages, in Australia’s outer suburbs.

Many, indeed, might regard his remark as callous.

Especially as the Reserve Bank also admitted, in assessment it made of the stability of Australia’s financial system yesterday, that it expects more foreclosures in future, as some, now overcomitted, homebuyers find that they cannot meet their monthly payments.

The bank did say that, statistically, the number of sub-prime mortgages in Australia is not large enough to threaten Australia’s financial system.

Australia’s politicians, undoubtedly, are now delighted with their decision to flick pass the decision to raise or lower the nation’s official interest rates to to the Reserve Bank.

It means that barely visible officials, like the Reserve Bank board members now cop much of the blame for raising rates.

Not the highly visible politicians.

This has genuine advantages, though,  in terms of risk management.

It means, for example, that rates will be raised, when necessary, even if an election is imminent.

Politicians, on any side, could never be trusted to do that.

But political – and economic – policies often have unintended consequences.

And that has, certainly, happened in this case.

At 3.6 per cent – and heading north – Australia’s inflation is higher than it has been for 16 years. Dangerously high, in fact.

For the good of the entire community, it has to be vigorously attacked.

That usually involves raising interest rates.  And that is quite right, when the circumstances demand it, as they do now.

What is clearly not right, though, is that the burden of steps taken for the common good should fall, quite disproportionately, on one section of the community.

That is the one third of the mostly young Australian families who are paying off their homes.

Other policies, too, can be used to fight inflation.  Tax rises, for example, also reduce demand.

Cuts in government spending, too, can be deflationary.

It would, of course, also be unfair to place too much of the blame, for all this, on the shoulders of Glenn Stevens and his board.

It was, after all,  the politicians who set up this system, not the Reserve Bank, which simply administers it.

Even good policies, though, can ultimately prove counterproductive, if they are applied callously.

And that is a point which sometimes seems to escape Mr Stevens.