Interest rates are a blunt tool for tackling inflation, and can hurt the people least able to absorb higher costs.

Abraham Maslow, an eminent psychologist, once said, “If you only have a hammer, you tend to see every problem as a nail”. This seems to be the response to inflation by the Reserve Bank of Australia, acting as if its only tool is increasing interest rates, a crude and unjust response to a complicated problem.

Inflation arises when demand for goods and services is greater than supply. More precisely, if demand is greater than national economic capacity (raw materials, industries, labour force, skills, education) and available imports, then inflation is likely.

Raising interest rates is intended to reduce demand for goods and services across the board. It is crude because inflation can have many causes, including supply shocks, high aggregate demand, demand for a particular product such as oil, financial speculation, exchange-rate movements, labour shortages, geopolitical disruptions, monopoly pricing and other forms of profiteering. It will have little if any benefit in controlling inflation resulting from several of these causes.

Raising interest rates is unjust because it penalises individuals and businesses who have borrowed money, but benefits those who have savings and investments. It benefits the wealthy while harming those with low and medium incomes.

Recent reform of the Reserve Bank gives it two specific objectives within the overarching goal to “promote the economic prosperity and welfare of the people of Australia, both now and into the future”. These objectives are (1) stability of the currency and (2) full employment.

Unfortunately, the RBA’s preferred strategy for its first objective undermines its second objective. Raising interest rates reduces spending by........

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