"If raising interest rates controls inflation, why is it that the USA has dropped interest rates aggressively while we have raised rates aggressively while Japan has kept them neutral, yet we all have rising inflation?"
The answer is differences in domestic demand - our economy is a lot more robust at the moment, due to the commodities boom, a less weakened financial system and myriad other factors.
Now quite obviously oil prices, a major part of inflation at the moment, are beyond the full control of the RBA (although the high A$ has lowered the rise somewhat). The same goes for food. But if you look at the other components of the CPI, you can see that there are a number of domestic (ie non-tradable) factors driving inflation:
Mar 08 qtr YoY% change: Housing 5.7% Health 4.6% Education 4.3%
The US, for instance, has a completely different situation with regards to house prices and rents at the moment. Differences like these across countries are why we have different policy settings.
As for the current account, while making imports cheaper does increase demand for them there is a counteracting effect that people have less money generally to spend on them and this reduces demand. And if the Australian dollar falls, this will worsen the current account defecit as the cost of servicing foregn debt will increase.
I put two questions to you:
Firstly, how can you believe interest rates have no effect on inflation if you also believe they make imports cheaper?
Secondly, what's your magic solution to replace inflation targeting that keeps interest rates low while also keeping inflation low?
