During the past week my company, Yellow Brick Road, started “The RBA Appeal”, an online campaign that allowed Australians to tell the Reserve Bank the kind of financial pressures they were under. While watching the videos and reading through the emails and messages, one thing that struck me was the degree to which people don’t really understand the role of the Reserve Bank.

The Reserve is an independent government agency that oversees the financial system, and controls things like foreign exchange reserves and gold policy. But what it does once a month is meet and discuss whether they will raise their official cash interest rate – the rate at which the government will lend to the finance sector. By setting this official rate, they set a benchmark for variable rate mortgages because lenders price their mortgages off the official cash rate. This is called monetary policy – controlling an economy with the cost of money.

The RBA’s mandate is to keep inflation within healthy limits, between 2 and 3 percent. It does this by raising interest rates when inflation is too high, and dropping interest rates when inflation looks to be too low. The problems at the moment are not of the RBA’s making. Inflation is coming from areas that cannot be controlled by monetary policy. For instance, the government can pursue a fiscal policy in parallel with monetary policy. In fiscal policy, the government controls the economy with the supply of money – its own spending- via a fiscal stimulus package or a First Home Owner Grant. This can be inflationary.

So the RBA can be raising interest rates to control inflation created by government spending. There are also problems with a ‘two-speed’ economy that the RBA cannot deal with by simply manipulating interest rates. If mining is booming, creating inflationary pressures with the wages it pays and the increased spending it has to make, then the RBA cannot quarantine that inflation because of where it comes from. Likewise with the actual prices that are rising.

The RBA controls overall inflation with reference to the Consumer Price Index, a rolling average of prices in Australia created by the Australia Bureau of Statistics.

It’s 11 line items, from food and alcohol to education and financial services. When these add up to a CPI of near to or over 3 per cent, the RBA will lift interest rates, regardless of the fact that some of this result is caused by one sector, such as power generation or supermarkets. So, Middle Australia pays the price rises and then gets hit with interest rate rises. It doesn’t seem fair but it is our system. Regardless, we all deserve a say, so keep those messages and videos coming.