INTHEBLACK October/November 2024 - Magazine - Page 22
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F E AT U R E
price stability,” Hogan says. “That’s what this is all about
– getting inflation down to a level that we would regard
as having low and stable prices.
“In most countries, it’s around 2 per cent, but in
Australia, we chose some time ago for it to be
2 to 3 per cent. The hideous factor in this current
cycle is our starting point. That is, interest rates were
virtually at zero in most countries, including ours.
“That’s meant that there’s this issue of changes in
interest rates being very large, by the 425 basis points
of rate hikes we’ve seen, and the potential that has
to disrupt the economy, particularly mortgage holders.”
Hogan says it is long-standing economic theory that
there is a level of real interest rate that should equate
to price stability.
“Historically, there has probably been a real interest
rate around 2 per cent or 3 per cent, but of course, going
from where we were to where we need to has been a very
difficult process. [Australia is] still obviously a little way
off in terms of getting back down to that target band.
“The theme is to get interest rates to the right level.
Then if it’s not working there, look at specific markets.
Inflation is a rise in the overall price level, and the only
way to deal with that is through setting up the right
monetary policy.”
Jomo says the rise in inflation has been the pretext
for central banks to hike interest rates. However,
22 INTHEBLACK October/November 2024
he notes that higher interest rates, while suppressing
demand, do nothing to address the fundamental recent
causes – namely supply-side disruptions.
“You have a very blunt tool, if I may put it that way,
where central banks have raised interest rates, but with
limited effect on the main cause of recent inflation,” he
says. “The other factor to bear in mind, of course, is that
raising interest rates raise all kinds of other costs.
“The supply-side factors driving inflation also raise costs,
and so to some extent, there has been a knock-on effect
of all this on inflation.
“This is sort of what the Americans would call a perfect
storm, which has kept inflation going.”
Jomo says the various responses to tackling inflation
remain varied, often driven by domestic considerations,
but also “by the appropriateness
of independent thinking”.
“When the US raises interest
rates, the European Central
Bank follows suit and other
central banks have to respond.
“Central banks behave in ways
READ
that seem to be concerted in
the sense that all interest rates
INTHEBLACK’s
are going up, but it’s more jazz
inflation, interest
improvisation rather than
rates and recession
a well-written symphony.” ■
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