What’s Behind the Push to Review Australia’s Central Bank?
(Bloomberg Opinion) -- The Reserve Bank of Australia presided over three decades of growth before Covid-19 tripped up the global expansion. The central bank is having a good recovery, too, with employment strong and inflation behaving. The reward for this performance: Widespread calls for change in the way the authority looks, sounds and does business.
The idea that the RBA should be subjected to fresh scrutiny has floated around the periphery of monetary debates Down Under for a while, but gained momentum in the second half of last year. The Organization for Economic Cooperation and Development and the International Monetary Fund recommended a review. The opposition Australian Labor Party — ahead in polls with an election in the coming months — wants one. Jim Chalmers, Labor’s top economics spokesman, says he favors a look at “goals and objectives, tools and levers, processes and public commentary.” Treasurer Josh Frydenberg from the ruling center-right bloc backs an examination after the election, he told the Australian Financial Review on Monday. No matter who wins, change is coming.
Politicians haven’t been specific about what result they want, nor has there been a meaningful inquiry into the bank in decades. It’s not so much anger or a sense of failure that surfaces in academic papers and think-tank panels as a “please do better.” On wish lists are changes to the RBA’s interest-rate setting committee, greater transparency, bolstering the bank’s ability to set policy in a time of rapid climate change and steps to enhance its independence from the government. There’s also grousing about the RBA’s failure to consistently reach its inflation target of 2% to 3% before the pandemic.
The Federal Reserve and European Central Bank have adjusted their approach in the past 18 months in response to years of undershooting the price goal. Advocates of an RBA review use this as ammunition. Two key points need to be emphasized here: The Fed and ECB reviews were generated internally, not set by elected officials. (Chalmers says he is open-minded about the best way to conduct it. Frydenberg prefers the RBA not review itself.)
The board, which former officials say is dominated by the perspective of bank staff, is a useful starting point. Outside members typically aren’t monetary experts. The positions have often been held by senior business figures, leaders of industry associations or academics, and in the past have included the heads of retailers, miners and organized labor. The seat reserved for Treasury looks like an anomaly. Can the RBA be truly independent with the government at the table? RBA defenders say the panel is designed to reflect a broad spectrum of economic and social life. Fine. But there’s a risk the external members don’t have resources or background to strongly challenge bank insiders. If you are a member of a rate-setting panel, that should be your primary — or only — professional obligation. (Imagine a member of the Fed’s Board of Governors being simultaneously a director of one or more publicly traded companies!)
Beyond the board, it’s worth examining how RBA governors are selected. There tends to be too much emphasis internally on who is next in line. In practice, the next governor is almost always the deputy governor. The last person to ascend from outside was Bernie Fraser, who ran the RBA from 1989 to 1996. And Fraser wasn’t a parapet-storming outsider. He was the secretary of the Treasury.
The RBA says it’s way more transparent than it was. That’s true. For the first time, during the pandemic, Governor Philip Lowe held a couple of press conferences after crucial rate decisions. These, however, were the exception rather than the rule. For leading central banks — and quite a few minor ones — the post-meeting briefing became a basic years ago. It’s not just about comparisons with the Fed, ECB or Bank of England. Bank Indonesia, the Reserve Bank of India and the Philippines central bank have briefings. Why does the RBA lag that emerging market trio?
For Lowe, the anxiety is understandable. He’s working within a remit handed down by the parliament and the Treasury. Appointments to the board, including governor and deputy governor, are made by the treasurer. He wishes folks who want change could be clear about exactly what they want.
His frustration was obvious in August, when he was questioned during parliamentary testimony: “When people say that there should be a review of the Reserve Bank, I’m not sure what they’re calling for — a review of the legislation, the mandate, the way the government appoints people to the board, the type of people they put on the board, or how we’ve done our job; we haven’t done our job effectively. All those things get conflated. What I’m responsible for is how we do our job, and the monetary policy regime that we employ.” He added: “I just wonder, when people want a review, what they actually want to review — other than than that they’re not happy with the decisions we're making.”
I have sympathy for Lowe. Under him, the RBA has become significantly more open and approachable. The governor does tend to give speeches very soon after board meetings, each accompanied by lengthy Q&A. Like many counterparts, he has also become a devotee of forward guidance, the art of projecting the path of rates sometimes years in advance. Minutes are published two weeks after meetings.
It’s also worth considering whether all the talk from verbose monetary authorities is necessarily useful at hinge points in policy. With inflation accelerating and some hit to growth likely from omicron, you want nimbleness. I am exasperated when I hear people talking about the Fed and say: “Oh, so-and-so is a voter this year, so X means Y.” No. Most times, only the core leadership group truly matters.
There’s such as thing as over-sharing, even in monetary conversations. It would be ironic if the RBA’s ability to convey what truly matters, when it matters, was hindered by a push for too much openness. Owing to massive bond purchases early in the pandemic, and now resurgent inflation, central banks are part of the political process — like it or not. That will place more demands on communication. Let’s strive for the right kind.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
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