RBA Interest Rate Hikes Risk Crushing Middle Class and Failing to Curb Inflation

The Reserve Bank of Australia (RBA) has been accused of hurting the wrong people with its interest rate hikes. RBA governor Michele Bullock and Prime Minister Anthony Albanese could be doing more to address inflation.

Australia's central bank increased interest rates in May 2022 for the first time in 11 years, setting off a gradual increase in unemployment. As the Reserve Bank raised rates from 0.5% to 4.35%, unemployment climbed from 3.5% to 4.5%, or about 150,000 people losing their jobs.

The theory behind interest rate hikes is that by taking money out of disposable incomes, people will spend less and businesses will refrain from increasing prices. However, this assumes a linear relationship between spending and inflation, which does not account for the cost of business inputs rising due to external factors such as pandemics and wars.

Australia's government has also been criticized for its role in driving up demand and prices through budget deficits. Collecting a fair tax on gas resources could have dissolved the deficit, reducing pressure on interest rates.