The interest rate rise is the wrong medicine and an even worse alibi | Yanis Varoufakis

Australia’s interest rate rise is the wrong medicine and an even worse alibi Yanis Varoufakis Inflation is again being used as an excuse for acts of vandalism on some of Australia’s important institutions

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W hen the Reserve Bank of Australia lifted its cash rate on Tuesday, with more rate rises in the pipeline, it did so ostensibly to combat an inflation rate swollen by petrol prices and gas bills, not by avaricious wage claims. Apart from a few beneficiaries, among them Pauline Hanson , the RBA’s move amounts to an act of pointless aggression against the majority of Australians.

An overheating economy is not the cause of the recent inflation spike. Its cause is a war of choice in the Gulf. Since US and Israeli bombs began falling on Iran, the strait of Hormuz has turned into a toll booth, shipping insurers have tripled their premiums, and tankers have been diverted around the Horn of Africa. In Australia, a tiny minority connected to the energy oligopoly raked in exorbitant profits while the vast majority felt the pain. The interest rate hike deepens the majority’s pain without delivering much gain.

There are two species of inflation, and central bankers have spent 40 years pretending there is only one. Demand-pull inflation occurs when households and firms spend more than the economy can produce: raise the price of money and you cool their ardour. Cost-push inflation is what happens when the price of an essential input is yanked upward by forces that have nothing to do with domestic demand: a war closing a shipping lane, a drought, a pandemic snarling supply chains. The price spiral now rattling through the Australian economy, courtesy of Donald Trump and Benjamin Netanyahu’s war on Iran , is cost-push to its marrow.

No plausible rise in the cash rate will open up the strait of Hormuz, or convince Gulf insurers to lower their premiums, or compel a barrel of Brent crude priced in a global market to come down because a Melbourne mortgage holder is stressed. What it will do is suppress Australians’ spending, wages, their ability to keep a roof over their heads, ultimately their economy’s capacity to invest and to produce. It is a little like treating a broken leg by amputating the healthy one.

In the meantime, the few beneficiaries of the war against Iran are laughing all the way to the bank. Australia is one of the largest exporters of liquefied natural gas on Earth, and roughly four-fifths of that gas is shipped out by foreign-owned companies, who then sell it back to Australian households at prices set by the same volatile international market that Iran’s war has set alight. Scandalously, as the Australia Institute has demonstrated time and again, they pay next to no tax. Against this backdrop, the rate increase is inexcusable: it is asking Australians to absorb a war-driven energy shock twice over, first as the owners of the resource receiving none of the windfall, and second as borrowers now paying a premium for mortgages that were never the cause of the price spike.