The US Federal Reserve’s emergency 75 basis point cut in official interest rates to 3.5% has put pressure on other central banks around the world, including our Reserve Bank, to follow suit.

However, the Americans are far more obsessed about growth and stockmarket values than inflation because we now have the absurd situation of negative real US interest rates. In other words, the Fed’s determination to bail out Wall Street for shoddy home lending practices has produced lower official interest rates than inflation.

In any other country, this situation would send a currency into free fall, but the collective wealth and power of American corporates and individuals allows its government and regulators to get away with it.

Imagine what would happen to the Australian dollar if official interest rates were 3.5%, the budget deficit exceeded 2% of GDP and there was talk of going further into the red with a stimulus package. It would struggle to stay above US50c. The US Government owes $US5 trillion and no-one seems to care despite what is supposedly a global credit crisis.

Australian official interest rates are now far higher than the first world average, but because of the strict inflation fighting charter given to the Reserve Bank, today’s 0.9% increase in the December CPI keeps the warning lights flashing that further rate rises are possible.

However, it is interesting to look at the component parts of that CPI figure as summarised by Business Spectator:

According to the ABS, the most significant contributors to the increase this quarter were automotive fuel up 7.3 per cent, deposit and loan facilities up 2.7 per cent, house purchase up 1.3 per cent, rents up 1.6 per cent, domestic holiday travel and accommodation up 3.7% and other financial services up 1.9 per cent.

Since December, the oil price has tanked and the other pressures seem to be coming from the all-powerful bank cartel slugging customers and the tight housing market.

Rather than putting up official interest rates, perhaps a better way to fight inflation would be to launch an assault against the banks which deliver Australians the world’s most expensive banking system.

The same can be said for a our supermarket duopoly which is copping a much-deserved inquiry into grocery prices after (Woolworths in particular) pushing the market power and profit barrow too far.

As for housing inflation, the 20% stock market correction will inevitably lead to some reversal in the property bubble as rising debt servicing costs on our $850 billion of mortgages kicks in and we follow the downward lead of the US and British housing markets.

However, the caveat here is tight housing supply caused by record immigration of more than 300,000 a year.

In summary, there’s a simple message in all of this – the best policy prescription for Australia right now is definitely not another increase in official interest rates. Don’t do it, Glenn.