Recent reforms have updated the wiring of the Reserve Bank of Australia (RBA), but left it running 20th Century software in a 21st Century climate system – and last week’s rate rise shows it.
In a world where inflation is being driven by oil shocks, extreme storms, floods, bushfires, and the spiralling cost (and sometimes disappearance) of insurance, lifting interest rates in Australia doesn’t stop greenhouse gas emissions, rebuild a washed-out (or burnt down) town, or lower global fuel prices. It just decides who at home will wear the pain: mortgage-holders, renters, small businesses, and people looking for work.
Across Australia and New Zealand, climate-supercharged disasters are now a recurring feature of the economy, not a footnote.
Rebuilding after floods and fires, disrupted supply chains across Australia (including across the Nullarbor), higher premiums, or no insurance at all. These are all inflationary in ways the old textbooks used a blueprints for central banks didn’t really anticipate.
The central bank can lean on its blunt instrument, but it cannot stop a cyclone or a shipping disruption in the Red Sea. When the shock is exogenous, treating the cash rate as the hero tool is a bit like trying to fix a leaking roof by adjusting the thermostat.
The recent RBA reforms under Jim Chalmers tidied up the wiring – two boards, clearer wording on objectives, more emphasis on communications – and that’s welcome.
But the software is still the familiar package: flexible inflation targeting, with unemployment as the main shock-absorber, and climate-driven inflation treated as something to be “managed” rather than a signal that our systems are under-built and mis-aligned.
The wider machinery of government too, like treasuries, consumer watchdogs, and the Future Fund, has yet to really absorb what a climate-disrupted, and simultaneously technology-disrupted economy means.
The Future Fund is still digging itself out of a legacy of fossil investments; consumer regulators are only sporadically alive to price gouging after disasters; defence policy is happily planning a surge in nuclear-related skills that may cannibalise scarce engineering talent from the clean-tech build-out. For a small country, that matters.
If we took today’s inflation seriously as a symptom of system design, we would act very differently.
Whole-of-government would move in concert: the RBA would clearly distinguish between domestic demand pressure and imported, climate-linked shocks; treasuries would deploy targeted fiscal support and structural investment, not blanket austerity; consumer watchdogs would treat exogenous shocks as prime moments for enforcing against profiteering; and the Future Fund would treat decarbonisation and resilience as central to its mandate, not a side-hustle.
At the same time, institutions would stay alert to the other big deflationary force now arriving: clean technology. Cheap solar, wind, storage, and smarter demand are already pushing wholesale electricity prices down; automation and AI will change cost structures again.
A static, one-tool-fits-all macro framework will not cope well with a world where some forces are strongly inflationary (climate damage, fossil shocks) while others are strongly deflationary (tech-driven cost collapse).
So what would a climate- and abundance-aligned upgrade to our economic software look like – keeping in short and without frightening the horses?
It would start by saying out loud that not all inflation is created equal.
When price rises come from climate disasters or overseas fuel shocks, the main job is to protect people from the worst impacts and to build an economy that is less exposed next time, not to manufacture more unemployment.
It would embed climate and transition risk in the way our financial and investment institutions operate, from the RBA’s reading of financial stability through to the Future Fund’s portfolio choices.
And it would treat abundant, cheap, clean energy and resilient infrastructure as core anti-inflation assets, not just climate policy. Updating the wiring was the easy bit.
Updating the software so that our institutions can handle a rougher climate, faster technology shifts, and a small pool of critical skills is the real task – and the 17 March decision on interest rates is Exhibit A in why we can’t keep putting that off.
Prof Ray Wills is an Adjunct Professor at the University of Western Australia and managing director at Future Smart Strategies
Prof Peter Newman is a John Curtin Distinguished Professor at Curtin University.
