The RBA will today decide whether it will raise interest rates to combat a growing inflation problem, but is it the best response? Although Glenn Stevens and his RBA colleagues are the nation’s chief inflation fighters, is raising interest rates the only response in the current environment? What role can the government play in helping to moderate inflation? And thinking more broadly, could the RBA’s toolkit be expanded to give it more flexibility to do its work?

Crikey put the questions to a group of leading Australian economists.

Frank Gelber, Chief economist, BIS Shrapnel. Inflation is a problem, it’s been a problem for a while but it’s been masked by the rising dollar. The RBA has no other instrument and no other choice. However, in terms of an interest rate rise today, in terms of the fact that the market has talked them into it and would be disappointed if they didn’t have an interest rate rise, I would be inclined to keep my powder dry. The problem for the RBA is that they have an ineffective monetary policy. That is, what choice does it have? A rate rise will hurt the housing sector, which is not the objective in this. It might cause consumers to cut back on consumption expenditure, but we’ve got a minerals-led investment boom, and an interest rate rise is not going to cut back investment at all. I don’t know what they are going to do today, but I would hold off. They’re going to need that room to move later on … The tax cuts promised during the election campaign are also now looking decidedly inflationary. The interest rate rises are aimed at households. The tax cuts are also aimed at households. If it were politically possible, the sensible thing to do now would be to rethink the tax cuts.

Stephen Walters, Chief Economist, JP Morgan. If the RBA raises interest rates today it will make meaningful difference to what I’d argue is a pretty serious inflation problem. That’s the conventional response, but what’s the alternative? If you let inflation run without raising interest rates inflation becomes embedded in expectations. Once that happens you’re in trouble because there’s an expectation that prices are going to stay high for quite an extended period, and therefore that gets built into pricing and wage arrangements, and you end up having to raise rates a lot more than you would have otherwise had to. But the government also needs to be careful with their spending. Productivity needs to be boosted. Workforce participation needs to be encouraged. Putting up interest rates is a blunt policy but it’s the only one the RBA’s got and needs to be done in conjunction with a coordinated policy across government, and certainly the new government has been making all the right noises. We’ll just have wait and see if they deliver.

Dr Ron Wood, The Econoclast. What we’ve got is called capitalism, not inflation. When the price of fuel goes up its because of reasons relating to supply and demand. That’s not inflation, it’s a market mechanism. If you’ve got fruit going up because suddenly you’ve got a shortage of bananas and that causes apples to go up because people buy more apples, that’s just a market mechanism at work. Same with fuel, we know why that has gone up. The other things that have gone up are all the bits that contribute to the RBA raising rates: rents, and interest and deposit facilities. If you take only those four items out of the CPI that leaves you with 111 out of 115 items. You’ve still got 97% of all items, which represent an inflation figure of 2.4%, which is at the lower bounds of the target range, and it’s been stuck at the lower end for two years, even including the impact of fruit, fuel and the RBA controls. What a lot of economists do is say that if the CPI is rising that must be a sign that the price mechanism has broken down, then they make the leap to say we must have inflation. But if the CPI is not rising that much at all, then you don’t even have the footprint of inflation. What we have is capitalism at work.

Josh Williamson, Senior Strategist, TD Securities. Besides the RBA’s ability to raise interest rates, the government is 20% of the overall economy and so there is an option there for the government to change its lever of expenditure and taxation in order to lower inflation. The new government has suggested it will be using the May budget in using those levers in damping down inflationary pressure. The RBA has a particular mandate and there isn’t much you can do to change their approach to fighting inflation. We can probably expect the government in a short term sense to actually moderate some of their expenditure, and also look at ways of cutting waste. We also shouldn’t forget the significant public speaking role the RBA has in all of this. The RBA can effectively use the media to get across a message to households and the market, and you can occasionally get the desired response by jawboning the market rather than actually raising rates. If the central bank is credible, the threat of higher rates can actually dampen inflationary pressures by moderating demand a bit. So that’s a subtle mechanism, but I suspect they are going to be more pro-active today.