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Bollard confirms inflation now beyond control

23 October 2008

Bollard confirms inflation now beyond control

Today's Reserve Bank decision to cut interest rates by 1 percent when inflation is running the highest in 18 years confirms that the thinking behind monetary policy is obsolete, says the Green Party.

"The tidy theory behind the Reserve Bank Act assumes inflation can be controlled by manipulating interest rates. That was true when inflation was the result of the boom part of the economic cycle, but is no longer the case," Green Party Co-Leader Jeanette Fitzsimons says.

"We have entered a new era where resource limits are the main driver of inflation. Even with declining oil prices during September, oil still contributed 1.4 percent of the 5.1 percent rise. Second order effects of oil prices, such as rising prices for food and other energy intensive goods and services, account for even more. They are internationally driven by resource scarcity and interest rates have no effect on them.

"When the limits of the atmosphere to absorb greenhouse gases are priced into energy and transport in 2010 and 2011, inflation will rise further, as the Bank has already told us.

Further droughts in Australia will raise the price we pay for wheat, and bread will go up again, Ms Fitzsimons says.

"There is only one way to control this kind of inflation-in-recession, and that is to control our dependence on oil and other scarce resources. Using energy, transport fuel and water more efficiently in the ways repeatedly outlined by the Greens since we came to Parliament and before, are the only economic strategy that will get us out of the mire we are in.

"Any political party that still thinks caring for the environment is a luxury we cannot afford when times are tough, and that we must 'balance' environmental protection with economic reality is not fit to lead the country. They need to catch up with business which is starting to recognise that the economy is a wholly-owned subsidiary of the environment."


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