RBA Shake Up
We wanted to jump on and put our personal thoughts down in relation to the “RBA Shake Up”.
Treasurer Jim Chalmers announced a review of the RBA last year, after global inflation skyrocketed post pandemic. After several cash rate hikes, public opinion started to turn and question who are the RBA and why are they making my mortgage repayments increase.
The role of a politician is to make representations of individuals in their area. However, they also need to remain popular so they are voted in next election and retain their jobs.
Therefore, many see this move from the Treasurer as political grandstanding - so his political party can point to the review that they did something about the RBA. However, the situation is more complex than this.
The independent review came back with 51 recommendations:
including:
The RBA should take account of climate risks but not use monetary policy to address them?
I am sure mums and dads all over the country will sleep better at night, understanding their central bank needs to take into account climate risk, but not use monetary policy to address it? How will this support mums and dads with high inflation and rising mortgage repayments? One of the many recommendations that confused us.
The main recommendations come down to the communication from the central bank, and the board of the RBA and how much say (or how they encourage diverse viewpoints and constructive challenge).
However, as pointed out by the Governor in his press conference 20/04/23 - his experience is that during boardroom discussions, viewpoints are raised and challenged.
Furthermore, a separate recommendation for the RBA’s new monetary policy board to release a statement after each decision meeting would mean that the scrutiny is spread evenly across the board, rather than just at the governor.
“The reporting, I hope, will be slightly different if you’re saying the board says this, the Board says that,” he said.
“I think that’s a constructive change and would reduce the focus on me as an individual because I’m just one individual here and we’ve got nine people taking these decisions.”
The Governor did agree that communication could occur better, whether that is through the structure of the briefings, the frequency or a combination.
Another recommendation is to strengthen its strategic communication - by appointing a chief communications officer.
However, the Governor rightly pointed out, that over communication can also lead to further noise which can become counterintuitive.
For years many financial experts have said that the RBA is to “secretive”, “insular”, “arrogant” and resistant to any form of criticism, given the wide impact of their decisions on our day to day lives.
Some of these changes will be welcomed, however should not be seen as a solution for the economic mess Australia finds itself in.
As the Governor rightly pointed out, if all 51 of these recommendations were implemented prior to the pandemic, we would more than likely still find ourselves with high inflation, as most central banks around the world are dealing with at the moment.
The structure of the central bank does not change the global factors that we have been dealing with.
During the press conference this afternoon, there was not a great deal of questions from a room full of financial journalists discussing the roles of both fiscal and monetary policy and how they work together or against each other.
We haven’t seen too much discussion over the fiscal policies of our country during the past 10 rate rises. It seems the government are content on letting the RBA do all the heavy lifting with the monetary policy and making them the scapegoat to date. We will await the Federal Budget in May to see how the fiscal policies will support the monetary policy in this country to continue to drive inflation down.
Governor Philip Lowe has done a fair job in a tough economic environment.
Especially given the rhetoric coming out of the Federal Reserve, that stated that inflation was transitory coming out of COVID.
Lowe could have done things differently (mainly the quote about interest rates not rising until 2024), but always better with hindsight.
Lowe’s term will end in September and after this review, it will be difficult for the Governor to hold on to his post. He will be highly sought after in the private financial landscape.
Which is concerning for the Australian public, given his experience, knowledge and expertise. This has been illustrated when he has addressed senate committees and more recently the financial journalists in today’s media press conference. He had an arrogance about him that comes from being the smartest person in the room. The questions asked in the press conference today, also highlighted how little financial literacy Australian’s have and how little financial information is disclosed to Australians through large media outlets.
How will these 51 recommendations affect you and your family?
The short answer is - it will not.
The infamous quote that Governor Lowe will be remembered for:
“The point I want to emphasise is that for inflation to be sustainably within the 2-3% target range, wages growth needs to be materially higher than it is currently,” the reserve bank governor said.
“The evidence strongly suggests that this will not occur quickly and that it will require a tight labour market to be sustained for some time. Predicting how long it will take is inherently difficult, so there is room for different views.
“But our judgment is that we are unlikely to see wages growth consistent with the inflation target before 2024. This is the basis for our assessment that the cash rate is very likely to remain at its current level until at least 2024.”