The Reserve Bank’s great gamble on interest rates

The fiscal path outlined in the federal budget will constrain monetary policy and undermine the stability of the Australian economy. The Reserve Bank of Australia will be forced to pursue expansionary monetary policy that will leave it impotent in the event of future economic headwinds.  

The RBA’s decade-long experiment with record low interest rates has created an economy that is dependent on low borrowing costs and has emboldened the Federal government to dramatically blow the government debt out to $1.7 trillion over the next decade.  

High levels of government and private debt has committed the RBA to a policy of continual monetary expansion that will trap it between a rock and a hard place should price inflation…