Flat White

The Reserve Bank has failed us

11 March 2021

4:00 AM

11 March 2021

4:00 AM

Earlier this month, former Treasurer Peter Costello stated the bleeding obvious when he warned “ultra-low interest rates risk creating the next financial crisis if central banks keep borrowing costs at record lows for longer than necessary”. 

Costello continued:

I understand what’s going on, that we’re trying to reassure everybody that monetary policy and fiscal policy will be supportive for as long as it is needed. But I think the critical thing at the moment for central banks and governments is to think of the exit strategy.”, 

Because if we don’t have an exit strategy, we will be building up the next financial crisis, and you know what the next financial crisis will be? It will be asset bubbles. 

Well, welcome to modern Australia. With golden soil and (imaginary) wealth from property speculation — where apparently 20% annual property price inflation is not a problem for the RBA. 

The fundamental problem with much of the Australian economic commentariat is that they don’t understand civics. Or history, but let’s just focus on civics. 

The RBA is an arm of the executive. It does not have its own sovereignty. The notion that the RBA is “independent” is a matter of policy and not of legislation or constitutional design. 

The current model of central bank independence goes back to August 1996 when, ironically, (then) Treasurer Peter Costello and (then) RBA governor-designate, Ian Macfarlane jointly issued a Statement on the Conduct of Monetary Policy.  This statement: 

[R]eiterated and clarified the respective roles and responsibilities of the Reserve Bank and the Australian Government in relation to monetary policy and provided formal Government endorsement of the Reserve Bank’s inflation objective  

This was the granting of independence to the RBA for the conduct of monetary policy.   

Yes.  There were subsequent revisions to this monetary policy statement by subsequent governments, but the RBA retained and retains its independence on running monetary policy. 

Paul Keating’s 1990 “recession we had to have” was in fact the recession Keating chose to give Australia. The RBA was not independent at the time but an instrument of policy of the elected government. 

The logic of giving central banks, like the RBA in Australia, independence is that it gives business and capital markets confidence that central banks will manage monetary policy independent of political pressures and follies. That interest rates would not be cut for political purposes 

But that was then. This is now. 

We have a central bank whose leadership is subject to groupthink (anyone in a senior position not educated at MIT?) and who strut around playing politics giving speeches on matters well beyond their mandate, including climate change and the conduct of fiscal policy. Besides, can any government in the world cut interest rates to below what they are now? 

It is particularly worse in Australia because RBA interest rate cuts have absolved governments from the need to undertake fundamental economic reform. Why bother taking the political risk when the Mandarins of Martin Place can just inject a hot shot of monetary stimulus any time economic pressure builds up.  The trajectory of Australia’s interest rates and Australia’s lack of economic reform cannot go unnoticed. 

If Australia’s central bank wants to engage in politics, it should be subject to political accountability.  That means being subject to electoral control. 

For the economic benefit of the nation, let’s end this charade and bring the RBA back under the director control of the Treasurer. Josh Frydenberg may not be the sharpest knife in the draw, but unlike RBA Governor Phil Lowe, he is at least subject to election every three years or so. 

Stephen Spartacus blogs at Sparty’s Cast.

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