Are there any (good) alternatives to interest rate hikes to cool inflation?

There are no clear alternatives to interest rate hikes for combating inflation in Australia. The Reserve Bank's interest rate decisions are often seen as a blunt tool to manage inflationary pressures. Higher interest rates can cool inflation through multiple mechanisms, such as increasing the value of the Australian dollar, discouraging spending by making saving more attractive, reducing business investment, and squeezing household cash flow by impacting mortgage holders.

While higher rates can be decided and implemented quickly, their effects take time to materialize, typically around 12 to 18 months. This delayed impact makes it challenging for the Reserve Bank to precisely gauge whether they have taken adequate action to stabilize the economy. Fiscal policy, encompassing government tax and spending decisions, can also influence demand and prices.

However, government budget settings primarily depend on the annual deficit, measured as a percentage of GDP. Presently, annual deficits are roughly 1% of GDP, which does not significantly stimulate the economy. Unlike monetary policy, fiscal policy decisions involve complex moral and ethical considerations, such as the allocation of health, education, safety net, and national security resources.

Therefore, most senior economic policymakers believe that managing the economic cycle should remain the Reserve Bank's responsibility, while fiscal policy should focus on long-term aspects, such as efficient taxation and agreeable government spending. While there have been instances where governments have helped boost the economy during external shocks, like the GFC and COVID pandemic, the effectiveness and timeliness of politicians' actions in withdrawing money from citizens' pockets to cool demand remain uncertain.

Although some have proposed using a temporary tax to manage inflationary pressures, no independent fiscal policy-setting body exists, and it would likely require significant political and democratic buy-in to implement such a measure.