Beat inflation without raising interest rates? We can do it, but it’s slow, hard and politically risky

June 19, 2023

Person watching stocks on laptop

Interest rates have risen at the steepest rate ever, as the Reserve Bank hikes the cost of mortgages and lending to try to stomp down inflation. Is there a better way?

Just over a third of households have owner-occupier mortgages.

The cost of servicing a home loan is up 106 per cent in a year — more than double — and the impact is worst for those who are younger and have paid off less of their loan.

“Those households that are in that phase of life where they’re trying to pay off their home, establish their family life … they’re being hit from both ends,” says Emma Dawson of think tank Per Capita.

Emma Dawson 1
Executive director of think tank Per Capita, Emma Dawson, sees trouble ahead, with the Reserve Bank tipped to lift interest rates again: “Already, the price of essentials is rocketing.”

“They’ve got a rising cost of living, education costs are going up, all of your food, all of your essential spending is going up, and your housing costs are going up rapidly as well.”

Is there another way?

But we could lower inflation without the Reserve Bank continuing to lift the cash rate, which acts as a benchmark for interest rates on mortgages and other loans.

Some economists and other experts have pointed to inflation-busting options that aren’t interest rate rises.

The problem is they’re often slow, hard, politically risky and not always guaranteed to work, at least not without the risk of unintended consequences.

Things the federal government could do to try to lower inflation include:

  • Intervene in markets to cap or freeze prices in certain sectors
  • Put a super-profits tax on particular industries and save the proceeds or use them to subsidise consumer prices
  • Temporarily lift the amount employers pay in superannuation for workers in substitution for some part of wage increases
  • Increase the Medicare levy or other taxes
  • Pass interest increases on deposits faster, encouraging saving
  • Make it easier to switch providers like banks, insurers and utilities
  • Change competition laws to reduce large corporate power
  • Find ways to encourage improved productivity

Applying some or all of these changes might lower the rate of inflation.

The first two — a cap on gas prices and increasing tax on the industry’s profits — we’re already doing. Most of the others would require new laws and potential political pain.

None are as quick and simple as lifting interest rates, which takes money out of the economy as households cut back spending to make payments on the roof over their head.

“The (ideas) would have a deflationary impact,” Ms Dawson says.

“But they’d take more time.”

Blooming optimism

Florist Marilyn Cini wants various options to be tried, because there’s one simple factor inflicting pain in her community of Aberfeldie in Melbourne’s north.

“Interest rates. Interest rates. A lot of people have bought homes, they’ve got children, a lot of people have lost their jobs through COVID. It’s tough.”


Florist Marilyn Cini’s customers are pulling back. “It’s really tough at the moment for a lot of families, they can’t put food on the table, everything’s going up”.() 

Rocketing prices for supplies and power mean the sole trader can’t afford to hire staff. Her mortgage payments have doubled, so she’s in the same position as her customers — making difficult choices.

“At the end of the week, you work out what you’ve made,” she says.

“Can you afford to buy a little bit extra, a little bit of luxuries, go out for dinner? Or do you pop it on the mortgage? Or do you put it aside for a rainy day? So everybody’s in the same boat.”

Gas power

Already, one inflation-deflating action that isn’t interest rates has been tried — and appears to be having a positive effect.

In April the federal government announced plans to extend a cap on gas prices through to mid-2025, having stepped into the market late last year.

When the cap was announced Treasury estimated the government’s one-year intervention would wipe $230 from people’s future power bills on average, but that they would still increase by several hundred dollars before the middle of next year.

When it recently announced the default market offer electricity price rises for Australia’s south-east, the energy regulator said government interventions in the gas and coal markets had reduced an expected 35-50 per cent rise in power bills to 20-25 per cent.

Reserve Bank Governor Philip Lowe told a Senate hearing the caps on gas and electricity prices had shaved half a percentage point off inflation.

A further program that gave some people relief from energy bills lowered inflation by a further quarter of a percentage point.

“This year the combination of those measures is reducing inflation by three quarters of a per cent.”

With the consumer price index (CPI) showing inflation at 7 per cent, and the central bank wanting it between 2 and 3 per cent, that’s helpful.

But what else could the government be doing?

‘Blunt, savage’ tool

The Reserve Bank, independent of government, has one main tool to affect inflation. Lifting interest rates can’t do all the work, but it’s the only lever the bank has.

“It is a blunt, savage instrument,” says Peter Burn, the director of policy at Ai Group, a business lobby.

“It’s aimed to suppress demand. It’s the best tool that we have available for a short-term response.”

That’s because the economy has expanded and diversified.

Peter Burn colour
Dr Peter Burn of the Ai Group says inflation needs to come down, despite the pain: “If it’s stable, people can plan around it. It’s predictable. That’s good for investment. It’s good for consumers”.() 

One of the reasons the government could successfully take on the gas industry was its size and lack of diversity.

“With upstream gas, there’s a very small number of suppliers. So it’s relatively easy to identify them and to corral and to regulate them,” says Dr Burn.

A person with their trolley in a supermarket aisle.
Australia’s supermarket sector is dominated by two players. But is a supermarket-super-profits tax realistic?() 

That’s not the case with supermarkets or telecommunications companies, who have more customers and companies that supply to them.

“Most other things that we buy, there’s many, many more suppliers, and it’s much more difficult to coordinate,” Dr Burn explains.

“And, with that larger number, you’ve also got a variety of production conditions, so setting a single price makes it very difficult.”

Our economy is only guided by the Reserve Bank and government decisions, not forced.

Telling industries and companies how to set their prices or wages isn’t simple nor, most economists would argue, generally effective.

“We could go down a route of direct price intervention and wage intervention. But it’s very difficult to do, we don’t really have the institutional set-up to do it,” Dr Burn concludes.

The Accord

You’ll often hear about the Accord, a historic agreement signed 40 years ago between the Labor government and union leaders.

Workers agreed to stop asking for wage rises in return for a “social wage”, tax cuts, better unemployment benefits and a precursor to superannuation.

But, with more people on individual contracts and lower union membership, that wouldn’t work today.

“We no longer have a centralised wage fixing system,” says Dr Burn.

Bob Hawke
Prime minister Bob Hawke signed a deal that changed Australia. The conditions that made it work don’t exist any more.() 

This month’s decision about the national minimum wage was important for the people it affected, boosting pay packets and helping those workers fight inflation. But it doesn’t affect a huge number.

“The national wage case only applies to about 20 per cent of employees,” Dr Burn adds, meaning there’s no realistic chance of a future Accord that could lower inflation.

“So we don’t really have the tools for price intervention that might be an alternative to those blunt, macroeconomic tools.”

‘Instant loss of confidence’

Retailer Phoebe Vincent fears the interest rate rises will drive the nation into recession, with business collapses, higher unemployment and a shrinking of economic output.

Phoebe Vincent
Phoebe Vincent, director of homewares and furniture brand Vincent Design.() 

When the Reserve Bank started lifting rates in May 2022 — the first rise in 11 years — she recalls customers having an “instant loss of confidence”. Sales for the year are down between 30 and 40 per cent.

There have been 12 hikes in just over a year, with the impact now hitting ahead of when the board meets to decide rate movements on the first Tuesday of the month.

“It feels like a couple of days before that Tuesday, it’s really quiet. And then it feels like about a week to 10 days afterwards … everyone’s sort of in shock.”

At Vincent Design, customers are taking longer to confirm orders on big-ticket items like sofas and dining tables.

“There’s also that ‘guilt’ of purchasing,” Ms Vincent says.

“They also have an increased cost and power bills and all that, the supermarket bills, but I think even if they have got more money, they don’t feel like they can spend it. There’s that resistance to spending it.”

Stop spending

The Reserve Bank governor has warned consumers that if inflation continues so too will interest rate rises, something Phoebe Vincent struggles with.

Phoebe Vincent 2
Phoebe Vincent, of homewares and furniture store Vincent Design, is frustrated by commentary from RBA governor Philip Lowe asking people to stop spending so much – to reduce inflation.() 

“It’s horrible. When you hear Philip Lowe say ‘stop spending’ it feels like, where do the small businesses fit into that?” she says.

“If people stopped spending in a business like mine, which they already have, that affects us as business owners, our five staff.

“If people stopped buying from us, and people are told to stop buying from us, it affects our Australian manufacturers. It affects our delivery team. It’s such a snowball effect of people.”

Adding to the pain, soaring profits from large corporate entities that enjoy oligopoly status in Australia’s small economy.

“What I think is so frustrating is you look at things like the banks, and the supermarkets, and even Qantas, they’re posting record profits,” laments Ms Vincent.

“And there doesn’t seem the pressure on them to reduce their profits for the good of all of us. It’s on us to stop spending.

“It’s the big businesses with their massive profits, and the super wealthy that really are driving inflation problem.

“So when (Mr Lowe) tells people to stop spending in businesses like mine, or that we just need to take a boarder in or work more hours, it’s pretty confronting, because there’s not much more I can do.”

Telstra bill

Some of the ways we could reduce inflation is to make it easier to switch providers. This would increase competition and slow rising prices.

Dr Leonora Risse, a senior lecturer in economics at RMIT University, says we need to be “alert” to businesses using inflation to make bigger profits.

“And government can play a role there, indirectly, in making sure that information is clear and accessible for the general population, and also to ensure that those processes of switching providers are not cumbersome and not confusing.”

A bill sent to Telstra customers highlights the problem.

Telstra bill
This Telstra bill tells customers prices must rise in line with CPI, currently 7 per cent a year. But the consumer price index is a basket of goods bought by households. Business costs haven’t risen as much.

It says mobile phone bills will rise in line with the surging consumer price index (CPI), which is currently 7 per cent a year.

But CPI is a measure of costs for households, the cost of a literal basket of goods they buy.

But, within that basket, the costs for the telecommunications sector only rose by 1.2 per cent over the past year.


That’s a big gap.

Telstra’s actual cost increases as a business are not directly related to the CPI, so it appears to be a somewhat arbitrary figure by which to raise prices.

In response, Telstra says some of its business costs have increased by more than CPI, but it chose that number as the basis for its price increase because it is the one best understood by consumers.

Another way

To Emma Dawson, what we’re doing to fight inflation — raising interest rates — isn’t fair and isn’t working particularly well.

Emma Dawson, Per Capita wants to see the burden shared: “It’s essentials that are taking off, non discretionary spending, things you can’t not spend on. Your heating bill, your food, the roof over your head, transport to get to work”.

“We’re trying to fight inflation by punishing households who have debt,” she says.

Adding to the pressure, around one-third of households have paid off their housing.

With the interest on deposits rising, along with rents for those who are landlords, many in this group have more money — and are spending it.

“There’s a certain section of society doing very well, but rate rises are not going to affect them or bring their spending down. And that’s simply because the Reserve Bank does not have any other tools in its box.”

Options for the federal government aren’t easy either.

  • A freeze or cap on increases to rent would require agreements with separate states and territories.
  • Lifting the Medicare levy — currently 2 per cent of taxable income — would hit stretched middle-income households.
  • Changing other parts of the tax system like negative gearing, superannuation concessions or the capital gains tax discount would require new laws to be negotiated through parliament.

But it could happen, if the recent Victorian state budget is any guide.

“It put a tax on second properties, a fantastic move will actually raise some revenue and hit people where we need to, which is people with excess assets,” Ms Dawson argues.

“We tax people in their working lives, particularly low and middle income workers, far too much compared to those assets that people have built up.

“So it would be a way of over time reducing inflation.”

Inflation fight

Florist Marilyn Cini is more worried about her customers than herself.

“You’ve got to ride the wave, it’s up and down,” she says.

“A lot of people don’t have a lot of money. I believe in quality, value for money, and just looking after people that come in.”

The current struggle will roll on, because the Reserve Bank wants inflation down in its target band — between 2 to 3 per cent per year — and has signalled it will keep lifting interest rates to do it.

It sees high inflation as a wallet-sapping evil, that inflicts pain on households and the economy.

RBA governor Philip Lowe speaks at the Morgan Stanley Australia summit in Sydney
Speaking at a conference on June 7, 2023, RBA governor Philip Lowe acknowledged the impact of rising interest rates was “felt unevenly across the community”.() 

“The tool that the RBA has to achieve this balance is interest rates,” governor Philip Lowe says.

“I acknowledge that the use of this tool comes with complications … but this unevenness is not a reason to avoid using the tool that we have.”

There are other tools to fight inflation.

In the coming year we’ll see if they get taken out of the shed.

Originally Published Mon 19 Jun 2023, in the ABC, By Daniel Ziffer & Melissa Brown