There was a point in history where a review of the Reserve Bank of Australia would not have been a blockbuster news story. After all, the conduct of monetary policy, and the governance of central banks, is a somewhat arcane topic.
However, following 10 consecutive rate rises — one of the fastest and strongest periods of contracting interest rates in the history of the institution— anything the RBA does now hits the front pages.
An increasing level of anger directed at the Reserve Bank, and by default at the Governor Phil Lowe, especially from mortgage holders, has been bubbling away in the background as this review was conducted.
With mortgage payments increasing by thousands of dollars— and in some cases tens of thousands of dollars — a year, there is an understandable sense that something has gone badly wrong and that someone must be to blame.
But this anger is neither the motivation of the review, nor likely to be salved by its findings; even should it claim the scalp of the current governor.
Although the review finds a number of flaws within the RBA, and is somewhat critical of its recent performance, the findings largely don’t align with the populist complaints against the RBA.
Indeed, there is a strong case that the RBA would have raised rates faster and higher had the monetary policy board recommended by the review been in place from late 2021; as the Reserve Bank of New Zealand did.
This change will satisfy monetary policy experts, but it’s hard to see the public being happy — assuming they understand the consequences of the changes.
The public disconnect in understanding is yet to resolve itself,but it won’t be pretty. Let’s take a step back.
The RBA review analysed the performance of monetary policy over three recent periods. First, 2016 to 2019, where inflation was under the RBA target. The second was the initialpandemic period where the RBA provided significant stimulus through novel monetary policy instruments, and the last was the recent high inflation period.
In each case, the panel finds errors in the conduct of monetary policy. The RBA was slow to act in 2016 and again in late 2021. It acted swiftly in the pandemic, but without clarity of purpose, and with inadequate oversight from the Board. At times, extraneous considerations derailed the optimal path of monetary policy.
The review believes the best solution to this is to place more responsibility for monetary policy in the hands of experts (and away from the governor), with more accountability and transparency for their decisions.
The RBA’s role would be sharpened to focus explicitly and exclusively on the trade-off between full employment and inflation, with the economic welfare of Australia reframed as an overarching vision, rather than as an alternative to the dual inflation and employment mandates.
This seems correct: if some areas of policy are technical and best handled by independent experts, then explicit guidelines and transparency are a necessity. The experts can then be fairly judged against explicit criteria.
But we cannot pretend this will be universally welcomed. Many would have preferred to broaden the RBA’s remit (for example to include climate change). Others would have preferred to subjugate the RBA to government once more.
The problem is whether the legitimate economic concerns of the public can — or should — manifest in monetary policy.
Fundamentally the issue seems to be, as has been seen from Governor Lowe’s public commentary and appearances before parliamentary committees, that the RBA has assumed a broad discretionary remit to consider what are essentially public policy problems outside the scope of pure monetary policy.
It’s unclear if this was voluntary or even if it is unintended. Rounding out the technical expertise of the RBA executive in monetary policy with ‘real world’ understanding and considerations is arguably why the RBA was given a more diverse board in the first place.
This broader remit was grounded in the phrase “the economic prosperity and welfare of the Australian people” contained in the Reserve Bank Act.
Unfortunately, this puts the RBA governor in a tough spot, especially given the effective abdication of governments from growth focused economic reform agendas.
Responding to these human considerations is a natural response, but it diminishes the effectiveness of monetary policy.
Take housing affordability — which may (depending on who you ask) have delayed interest rate cuts during the 2016-19 period. People were really worried about house price rises in 2016-17 and the effect of further reductions in interest rates.
It’s possible that the current pause in interest rate increases also reflects the triumph of other policy considerations over pure monetary policy considerations (though this cannot be known at this time). In this case, it’s the accumulation of negative effects of interest rate increases on mortgage holders.
In pure terms, both these actions would represent failures of monetary policy. Indeed, even the incorrect perception that the RBA was not moving interest rates because of high house prices or that interest rates were effectively ‘guaranteed’ to stay at record lows until 2024 represent failures; because effective communication in an essential part of policy.
But the shrinking of the RBA’s mandate will only be effective it is accompanied by a corresponding expansion of the accountability of government for economic decision-making.
House prices exploded because of extensive restrictions on supply, especially at the local government level. Inflation has run out of control because of excessive government stimulus during the pandemic — which was supported by both sides of politics.
The government’s implicit policy of shielding workers from real wage falls as a result of inflation will sustain inflationary pressures for longer. It might, indirectly at least, result in a recession.
People are right to be angry at massive increases in mortgage payments, but their anger should be directed at those actually responsible: politicians.
Politicians might be happy making the current RBA governor the scapegoat for our challenging economic circumstances, but the reforms from this review will make such scapegoating far harder in the future.
They may regret creating a vacuum in economic policy if they fail to fill it.
Simon Cowan is Research Director at the Centre for Independent Studies.