The Greens may bristle at the comparison, but their demand for the treasurer, Jim Chalmers, to order the Reserve Bank to cut interest rates now is Trumpist.
Nick McKim, the Greens’ economic spokesperson, says his party won’t support the Albanese government’s RBA reforms unless or until interest rates fall. Given the central bank governor, Michele Bullock, has repeatedly said a cut to its cash rate is unlikely in the near term, Chalmers must use his existing powers to make it happen.
For the many households or businesses struggling to cope with the fastest run-up of debt repayments in three decades after 13 RBA rate hikes, an intervention might sound appealing.
Part of the reasoning is that mortgage holders “are getting smashed right now”, McKim said, echoing Chalmers’ own words. The intervention powers already sit with the treasurer and cleaving the cash rate would end “the pretence that the RBA is independent”.
True, no government institution is entirely at arm’s length. The treasurer gets to name the governor and the government-appointed treasury secretary sits on the board. And should Chalmers get his way and set up an independent monetary policy board – as recommended by the year-long review into the RBA – he would get to ink their names into the accompanying media release.
But as politically attractive such a move might be, it would unravel three decades of economic changes. Some might welcome a return to an exchange rate being set by the government and a central bank at the whim of the government of the day.
There’s definitely some populist appeal, or otherwise the former US president Donald Trump wouldn’t be floating ideas in the US. Back in April, the Wall Street Journal reported some Trump advisers were weighing up the ousting of the US Federal Reserve chair, Jerome Powell, if he wins office in November.
A “small group” of allies were also scheming how to give Trump a role in setting interest rates in the world’s most important debt market, the newspaper reported.
Financial markets generally brushed off such a threat to the world’s biggest debt mark of a self-proclaimed billionaire business figure claiming to know more than Fed economists and officials. Then again, those concerns might be rekindled after Republicans’ anger at last week’s Fed rate cut – the first in four years – with Trump himself calling it “a political move”.
The size of the US market is astronomical, topping $US25tn ($A37tn) in US treasuries alone last year, with daily trading of as much as $US1tn. How a highly tradeable market – that influences global borrowing costs – would respond to a Trump intervention is hard to know but “bloodbath”, “catastrophic” and similar descriptors would probably feature in headlines that day.
For Australia, an open economy dependent on international trade and financial flows with a floating currency, an intervention by Chalmers to overrule the RBA would likely be just as calamitous.
Gareth Aird, the head of Australian economics at the CBA, the country’s largest bank, said the effects would be “massive” and long-lasting.
For the past three decades, Australia had enjoyed relative price stability. An intervention would effectively “make the RBA board redundant”, leaving investors – and the public – with little idea where future interest rates would go, Aird said.
The cost to Australia would be investors at home and abroad would demand a higher price – in interest rates – to lend money to Australian governments and businesses. Any rate reduction, in other words, would be temporary and at the cost of Australians paying a risk premium much like Turkey or other nations where central banks have been overruled.
Ironically, the RBA reforms that the Greens would be willing to wave through – should Chalmers act on their pressure – include setting up that more expert panel within the RBA to set interest rates.
After such an intervention, you’d have to ask, what’s the point of bringing more talent?
