The Australian government has been urged to boost productivity and address supply shortages after the Reserve Bank of Australia raised interest rates, increasing the burden on mortgage holders.
The RBA lifted its cash rate by 25 basis points to 4.60 per cent on Tuesday, taking it to its highest level in 15 years as it seeks to curb inflation.
However, Dr Christian Baylis, founder of Fort Lake Asset Management, said many of the pressures driving prices were not directly linked to household spending. Government expenditure, higher oil prices and strong investment in areas such as data centres were among the factors adding to demand, he said.
Why the RBA is raising interest rates
Baylis said the underlying problem was that demand for goods and services was exceeding the economy’s ability to supply them. The central bank cannot build roads, increase business investment or make companies more productive, he said, leaving it to restrain demand by making borrowing more expensive.
“The RBA has to effectively try to temper the demand because it can’t do anything about the supply side of the economy,” Baylis said.
Higher mortgage repayments leave households with less disposable income, reducing spending across the economy and potentially easing pressure on prices. But they do not increase the supply of goods, produce more oil, build infrastructure or improve business productivity.
Baylis said governments should therefore do more to strengthen the supply side of the economy, rather than relying on interest rates to suppress demand.
Call for government action on productivity
He argued that governments should reduce their overall footprint and run budget surpluses while inflation remained elevated. In his view, the government should be running surpluses of $30 billion rather than deficits of the same size.
Such a move could reduce pressure on the economy and give the RBA more scope to keep interest rates lower, he said. Other measures could include incentives for companies to invest in equipment, cutting red tape and building infrastructure that helps people and businesses work more efficiently.
Baylis compared the situation with a baker unable to produce enough croissants to meet demand. Making customers buy fewer would ease the pressure, he said, but improving the baker’s equipment would increase production and help meet demand.
“If you can reduce red tape, you can reduce green tape. All of these things allow businesses to produce the goods and services in the economy at a speed that would be consistent with the demand that will ultimately bring inflation down,” Baylis said.
He added: “It will help to offset the footprint that the government is having in the economy.”
