As we await another punitive rate hike from the Reserve Bank, thoughts turn toward the much-mooted review of the RBA being prepared by the government.
Until recently, the case for a review was dubious at best. Unusually, the bipartisan nature of calls for a review was evidence that something suspect was going on: all sides were bringing their baggage and political grievances to the table.
The review — which began life as an idea from Labor and the Organisation for Economic Co-operation and Development (OECD) and later was adopted by then treasurer Josh Frydenberg — would have allowed Labor to go after the bank for holding interest rates too high before the pandemic, allowed right-wing economists to go after it for holding rates too low and to try to get rid of full employment from the Bank’s mandate, and allowed a Coalition government to go after governor Philip Lowe for his now-abandoned advocacy for more stimulus and higher wages.
Something for everyone, as we noted last year.
Much of this thinking reflects a mindset among politicians that monetary policy can safely be blamed for any number of economic sins. In a seminar organised by the Reserve Bank last month on the “Causes, Challenges and Consequences of a Low Interest Rate Environment”, one paper from Professor Eric Leaper of the University of Virginia referred to the “hype”, which he argued was about “blame-shifting … elected officials’ desire for blame-shifting is insatiable”.
Leaper suggested that independent monetary policy was really “a gift from elected officials to themselves: whipping boy when economy turns sour”, a situation reinforced by economists, policymakers and the media. One of the consequences is a lack of appreciation for the role fiscal policy plays in inflation. “Let’s take fiscal policy seriously,” Leaper suggests. Is a review up to that challenge?
Recently the issue of board composition has also been thrown on the table — and everyone is bringing their ideological baggage to that too. The Australian Council of Trade Unions (ACTU) wants someone from, well, the ACTU on the board. The neoliberal hacks of The Australian Financial Review are warning against “politically correct” appointees to the board (as if stuffing the board full of business executives isn’t simply another form of political correctness masquerading as “the best people for the job”). Academic economists would like — brace yourself — an academic economist on the board.
This may be the high temple of economic policymaking, but, to invoke a biblical analogy, there are plenty of moneychangers looking to get in there.
But Philip Lowe and the RBA board have seemingly set out to bolster the case for a thoroughgoing review of the conduct of monetary policy. With the bank’s colossal backflip on interest rates and wages growth, the bank has doubled down on the case for a review on all sides. Was it too soft on inflation before it began raising rates? Is it being too aggressive in lifting rates now? What about the poor households foolish enough to actually believe Lowe and the board in their persistent statements that rates wouldn’t rise until 2024? What about new homeowners looking at double-digit declines in the percentage value of their major asset as a consequence of rate hikes? Oh, and what happens if the bank engineers a recession?
Then there’s the bank’s messaging. Is a double backflip with a 7.30 interview twist enough?
Bank supporters will argue, with some truth, that much of this is down to the extraordinary effectiveness of the RBA’s response to the pandemic, which has left us in a much better economic situation than many — most — feared in the dark days of 2020. Inflation is a much nicer problem to have than a lingering 1990s-style recession. But there’s not likely to be too many working households across the country inclined to see the upside of surging bills and mortgage repayments.
And one of the biggest single sources of those surging bills is the energy sector, which is in the middle of a historic collision between geopolitical forces and the laws of physics. We need to engineer a rapid transition away from fossil fuels and fully electrify our energy systems. The costs of that transition will be substantial and decades-long.
Will the RBA continue to see the costs of decarbonisation as an inflationary distortion that requires higher interest rates? Or should its mandate extend to include supporting rapid decarbonisation, given the profound impacts of climate change on the economy and thus on monetary policy?
The neoliberal purists are already blanching at the thought — in their view, the only mandate the RBA should have is to grind inflation into the dirt at every opportunity. Everything else is left-wing mumbo-jumbo.
But if they want a review of the RBA, and its mandate, then everything should be on the table.
