The independence of the Reserve Bank of Australia (RBA) and its inflation-targeting have served this country well and should not be abandoned, but its performance has been undermined by governments pursuing neoliberal policies, a former RBA governor says.
Bernie Fraser — who was RBA governor from 1989 to 1996 — says Australia's central bank has helped to deliver an average inflation rate of 2.5 per cent over the past 30 years.
He says that degree of price stability should have been the foundation upon which policymakers built a fairer society.
Instead, he says, governments have changed housing policies, and the tax system, and labour laws, in ways that have made wealth and income inequality noticeably worse.
Mr Fraser says that has undermined the RBA's ability to improve the economic prosperity and welfare of all Australians.
He says the Albanese government should keep these things in mind when it responds to recommendations from the review of the RBA, because the bank's independence and inflation-targeting framework should not be taken for granted.
Treasurer Jim Chalmers is due to receive the report from the RBA review by Friday.
The RBA in the 1990s
Mr Fraser led Australia's Reserve Bank through one of the bank's most transformational periods.
His term as governor began in September 1989, when interest rates were sitting around 18 per cent and the economy was about to suffer "the recession we had to have".
As a consequence of that recession, almost 320,000 people lost their jobs between June 1990 and February 1993, and the national unemployment rate jumped from 6.6 per cent to 11 per cent.
That destruction in economic activity squeezed inflation out of the system.
As that inflation receded, Mr Fraser's RBA board cut interest rates 15 times in a row. By mid-1993, it had cut the cash rate target from 17 per cent to 4.75 per cent — but that wasn't all.
In that period, the RBA was also working behind the scenes to overhaul its policy framework.
In 1993, it adopted a flexible inflation "target" of 2-to-3 per cent, which launched Australia's modern inflation-targeting era.
The bank was also increasingly asserting its "independence" from government by insisting on the freedom to move interest rates up or down without political interference.
By the time Mr Fraser's term ended in September 1996, a new era had begun.
And the new era — of central bank independence and inflation-targeting — saw 29 years of uninterrupted economic growth by the time COVID-19 hit Australia in 2020.
The former governor's opinion of RBA's performance
In anticipation of the report from the RBA reviewers being handed to the federal government this week, the ABC spoke to Mr Fraser.
Back in 1996 — when Mr Fraser's term as RBA governor was winding down — he gave a series of speeches about the new-look central bank.
In one of those speeches, he warned that the RBA would have to build broad community support for its new, anti-inflation objective and, to do that, it would have to build credibility in relation to its other objectives, namely delivering gains in employment and living standards.
He said the bank would also have to be mindful that, having just asserted its independence from government, it didn't lose that independence to bullying from financial markets.
"It would be ironic if one form of influence were to be substituted for another: If the short-termism of politicians were to be replaced by the short-termism of the financial markets," he said at the time.
How does Mr Fraser think the RBA has performed over the past 27 years?
"I think the bank has done a pretty good job, all in all," he told the ABC.
"It built up credibility because, on the whole, it's achieved its inflation target, although other things have contributed, but the bank has done a pretty good job in my view in contributing to that environment that has led to those three decades of pretty good growth.
"The distribution of that growth is another question but — in terms of generating growth and generating reasonably good employment opportunities and so on — it did a pretty good job."
Mr Fraser said the RBA's charter was "still as relevant as ever", and the bank had done a good job of balancing its objectives.
He said that, unfortunately, the bank's credibility had been damaged during the COVID-19 era after RBA governor Philip Lowe said the cash rate target could remain at 0.1 per cent until 2024 "at the earliest".
However, he said it would be a "great shame" if policymakers decided to overhaul the entire monetary policy framework because of one regrettable mistake.
"Credibility and independence are very much intertwined: you can't have one without the other really," he said.
"But, for the rest of that [30-year] period, including in Phil's time, the bank has done a pretty good job of keeping the inflation wolf at bay, and people have been pretty happy about that," he said.
The problem with neoliberalism
However, Mr Fraser said, the RBA's attempts to improve the economic prosperity and welfare of all Australians had been undermined by neoliberalism in recent decades.
In 2018, in a speech to the Australia Institute think-tank, he was already mourning what had happened to Australian society in the inflation-targeting era.
"A couple of decades ago, Australia seemed well placed to move on to better things," Mr Fraser said in that speech.
"It was not wildly fanciful to imagine that Australia might go on to become a rather special kind of society, combining a good measure of competency, fairness and compassion, and lighting a path which other countries might wish to follow.
"Fast forward to to-day and that vision has gone … on many measures, our society is now less fair, less compassionate and more divided than it was 20 years ago, and certainly more devoid of trust in almost every field of human activity.
"After 27 years of continuous growth, too many Australians remain unemployed, under-employed, under-skilled, under-paid and lack job security … and the unfair wage structures in many sectors do not make for a proud economic or social record," he said.
The ABC asked Mr Fraser how he squared those observations from 2018 with his positive opinion of the Reserve Bank's performance since the 1990s.
Hadn't independent inflation-targeting supported the neoliberal project, or did he see them as separate issues?
In recent years, historians such as Adam Tooze have critiqued the power dynamics involved in modern inflation-targeting, observing how the existing low-inflation regime of the period since the 1980s "opened the door to huge inequality".
"They're totally separate in my view," Mr Fraser told the ABC.
"Neoliberalism is about relying on the markets, and survival of the fittest in a market environment, and there's no guess who comes out on top in market environments: It's the well-heeled and the people who are able to take advantage of market power, and so on, and it's the people at the other end, the workers for the most part, who are left to pick up the crumbs," he said.
"Neoliberalism is about minimum tax, minimum government spending and lots of concessions for businesses and private entrepreneurs, because they're the ones that neoliberalism sees as driving the economy and. in a way they do, they drive growth, but it's the question of the distribution of growth [where] neoliberalism is a complete flop," he said.
Mr Fraser said the RBA had held up its end of the bargain by helping to deliver decades of relatively stable growth and inflation, but successive governments have failed to use those stable conditions to build a fairer society.
"The policies that have been in place over much of [that time] haven't been directed towards distribution in a fair way, and that's why we've got all these problems with backlogs in health care, aged-persons care, all those kinds of things," he said.
"They've been neglected for two decades, notwithstanding all this growth we've had over 30 years."
What would he like to see from the RBA review?
However, Mr Fraser said, when it came to the RBA's own performance, a few small things could still be done to improve things.
He said it was very important to maintain the quality of personnel in the bank and on its board.
He said it was "absolutely critical" that the Secretary of the Treasury remained on the RBA board, because the government would be under enormous pressure in coming years to spend more into the community, with the population ageing, climate change and other demands.
"There will have to be more coordination between fiscal and monetary policy," he said.
Unlike some economists, Mr Fraser said he'd also like the members of the RBA board to be more representative of the community.
"The world has changed a bit and, as important as employment and living standards are, there are other things — like productivity and competition among businesses … the digital economy, globalisation … even geopolitical [questions] … that are increasingly relevant to the determination of monetary policy these days," he said.
"And the big gap at the present time, compared with my time, is there's no person from the union movement [on the board]," he said.
"I’ve said on many occasions that Bill Kelty [a former ACTU secretary] was one of the most productive members of the board during my 12 years that I was there … his forecasts of what were going to happen to wages were always miles better than what the staff of the Reserve Bank or Treasury or anybody else was able to put together, and given that's going to remain a pretty important focus of the Reserve Bank … I think it's essential," he said.
Treasurer Jim Chalmers has said he will release his initial response to the report from the RBA review ahead of the May 9 federal budget.
