The Albanese government’s plan to scrap the treasurer’s power to overturn decisions of the Reserve Bank shouldn’t surprise anybody.
After all, out of 51 recommendations from the RBA review – all of which were accepted by the government in principle – the annulment of such power was the very first listed.
The RBA adopted an inflation target three decades ago and has been effectively independent ever since. But a provision in the RBA Act covering how “differences of opinion” were to be resolved left open the option of overruling the central bank.
The treasurer, Jim Chalmers, highlighted five of the review recommendations the government plans to legislate. Repealing the power of a treasurer to intervene on monetary policy decisions was third on the list.
Of course it’s tempting for borrowers to wish Chalmers had flexed that power to reverse at least one of the 12 interest rate rise during his tenure.
His predecessor, Josh Frydenberg, had even more incentive to intervene to delay the May 2022 rate hike that kicked off the cycle in the midst of the Morrison government’s ultimately unsuccessful re-election campaign.
Social welfare groups dealing with the mounting financial stress of households, too, would like see urgent relief in the form of rate cuts rather than one or more possible increases.
And why should the government reinforce the independence of the central bank, with governors pulling in a million dollars a year and even accessing subsidised mortgages in the case of previous boss Philip Lowe? It has been decades since unions were represented on the RBA board – and it’s unlikely any current board members, even the academic economists, would have endured impecunious times.
The RBA review itself “strongly” supported the bank’s independence, including the case for separating rates decision-making “from shorter-run government priorities”.
In short, central banks have to be credible. Markets, businesses, households have to believe that the RBA is able to commit to objectives – and not have verdicts vetoed.
“If an elected government controls monetary policy there are risks that it may try to push the economy to run above its capacity, resulting in higher inflation but with no lasting impact on employment,” the review argued. “Or it could more easily choose to finance budget deficits by printing money.”
Go down that route, and objectives of low and stable inflation would be ditched. “[W]here governments have asserted influence over monetary policy settings, such as in Argentina and Turkey in recent years, this has contributed to persistently high inflation and poor macroeconomic outcomes more generally.”
Turkey’s annual inflation rate was above 60% in October, while we are tracking at about 5% on a planned glide towards 3% in two years’ time.
Argentina’s inflation is running at about 140% and the country earlier this month elected Javier Milei, a far-right firebrand committed to abolishing that country’s central bank – something the RBA review didn’t predict but might have anticipated.
It would, of course, take a lot to go wrong in Australia for the country to head down Argentina’s benighted path.
Any hint, though, that the RBA’s independence was in doubt would immediately result in the country’s risk profile being reassessed.
Louis Kuijs, Asia Pacific chief economist for S&P Global, said the bond market would be one place where investors could be expected to respond unfavourably. Pressure from the government on the RBA not to raise rates would “worsen the inflation story in Australia”, he said.
Kuijs said it would be up to others to determine whether Australia’s fabled triple-A rating would be at risk but any intervention “would definitely be a negative”. Those investors would demand a higher interest to lend to Australian borrowers, in other words.
In sum, a “reinforced” independent RBA doesn’t guarantee it will be error-free but at least they wouldn’t have to fend off mistakes of politicians with their focus on a febrile news cycle and the next election.
