Curtin professor Michael Dockery urges Reserve Bank to take action on inflation after holding rates

The Reserve Bank’s recent decision to hold interest rates is not expected to last, as one of WA’s leading labour economists urges the bank board to be more assertive and take action on inflation.

The RBA voted unanimously at its August 11 meeting to hold the cash target rate at 4.35 per cent despite inflation continuing to grow above the ideal 2 to 3 per cent range.

The RBA said in a statement that financial conditions were gradually tightening in response to three increases in the cash rate target earlier this year, and it was waiting to see the results of this before increasing again.

“With monetary policy judged to be somewhat restrictive, the board decided to leave the cash rate target unchanged while it assesses how the economy is evolving. The board will continue to do what it considers necessary to bring inflation sustainable back to target, including increasing the cash rate target further if upside risks materialise,” it said.

But Bankwest Curtin economics centre professor Michael Dockery believes this action is just prolonging the inevitable.

“Inflation has now been above the 2 to 3 per cent target range for a full year and the latest figures show no sign of domestic inflationary pressures easing,” he said.

“They can’t just keep saying they won’t hesitate to act to get inflation back in the target zone – we must be close to the point where they risk losing control over inflationary expectations.

“I was thinking perhaps they might have to increase (the rates). The explanation they’ve given is that we’ve had three rate rises earlier in the year, and they’re saying they’re waiting to see them take effect to see how demand and so on reacts.”