The Reserve Bank of Australia has attracted quite a bit of criticism lately for its insistence that interest rates aren’t coming down. In fact the RBA’s public statements show little sympathy and suggest rate cuts are quite a way off yet.

As a group, central banks around the world have done a pretty good job over the last few years. It is their task to keep economies healthy and prevent them running way out of balance causing major hardships for the whole population.

Runaway inflation would be a huge problem for everyone. We have had a mild taste, but it would be much worse without central bank constraint. Out of control price rises would mean no-one can keep up, not producers, retailers or consumers. In extreme cases in history currencies have become worthless. 

The opposite disaster would be a severe recession. That would involve a shrinking economy due to lack of demand. People would be retrenched, prices would fall, many businesses would go broke, mass unemployment would develop as in the 1930’s.

Central banks prevent these problems. The greatest number of people survive and prosper when the global economy and individual countries’ economies are in balance, growing slowly but steadily.

Inflation escaped due to the subsidies and extra government spending during the pandemic. Central banks had to rush to recapture it. Economies and people do well when inflation is around two or three per cent, not twelve. We are aiming for what economists call a soft landing.

It’s a narrow path, putting the brakes on enough to slow economies but not stop them. Central banks are winning the battle against inflation. It is now fully contained in some countries and nearing that in others. This is being achieved without recessions and the above-mentioned nasties.

There remain risks to stable global economies. China has been weak and is trying to boost its economy. Recessions could still develop in some countries. The Middle East conflict could escalate. Oil supplies could be disrupted. Government debt levels are way too high in some countries.

The Reserve Bank insists Australian interest rates will stay high for some time yet because we lag other countries in getting inflation down. It remains elevated partly because of our various governments’ continued excessive spending, creating extra demand.

The RBA will keep the brakes on quite firmly, until inflation is close to the sub-three per cent target. It cannot cut rates early and risk inflation escaping again. The RBA’s actions will be good for the economy, and lead to better times ahead for everyone.