The Reserve Bank review, so we’re told, holds out the promise of “profound change” — change so striking, so sweeping, that it constitutes a “watershed moment” not unlike that which grounded the decision to float the dollar in the early 1980s.
“I think this will be one of the real legacies of the current government,” Isaac Gross, a former Reserve Bank economist who now lectures at Monash University, declared on RN. The recommendation to strip the Reserve Bank board of its power to set interest rates and instead repose that power in a new expert committee is, he added, “something that all Australians will benefit from”.
Others, by contrast, have resisted the idea that the review’s findings are in any way radical, framing the notion of this “shake-up” to the usual order of things as a triumph of theatre over substance. If anything, shrugged Reserve Bank governor Philip Lowe, the review’s recommendations are “kind of excellent” and won’t alter the prevailing approach of the central bank to inflation. Nothing much to see here, in other words.
But it’s possible the claims on both sides are overstating things in different ways. Zoom out a little, and it’s clear the review does in fact shift the dial with some surprising, even radical, recommendations, though not in the sense championed by Gross or downplayed by Lowe.
Zoom out further still and the picture that quickly emerges is a review bent on entrenching the power of neoliberalism in Australia — an impression reinforced by the Albanese government’s ready in-principle embrace of the review and its corresponding indifference, if not contempt, for the unemployed and the nation’s swelling class of renters.
For one thing, the review in no way interrogated the presumed efficacy of orthodox monetary policy. On the contrary, as economist and Torrens University associate professor Steven Hail told Crikey, it falsely assumed its underlying neoliberal logic was and remains sound.
“There’s simply no empirical or historical evidence that manipulating interest rates is the most successful way to try to manage inflation — none,” he said. “But the review doesn’t acknowledge this.”
“Nor does it consider whether a combination of fiscal policies and competition laws, such as a more aggressive approach to monopolists, would be better suited to managing demand and inflationary pressure.”
Instead, the review holds fast to that enduring but deeply confused and unsophisticated narrative that the one and only way to cruel climbing inflation is to punish low- and middle-income households by jamming up interest rates.
It’s confused because it supposes all inflation is driven by demand-side issues when the reality is otherwise, as the link between today’s inflation and supply-side disruptions such as the Ukraine war and climate change attest. Confused, also, because the Reserve Bank is aware it can’t plausibly exert any control over supply-side disruptions, yet its monetary policy furiously pretends otherwise.
And unsophisticated, because, quite aside from its penchant for invoking the unrealistic spectre of spooky, ’70-style wage-price spirals despite years of falling real wages, it pays no heed to the indirect and complex impact of raising interest rates on the economy — including, for instance, the demonstrated tendency of monopolists in a concentrated and uncompetitive market like Australia’s to profiteer from the inflation crisis.
Stepping back, the full, untrammelled narrative scarcely holds together, and yet the government has endorsed it in all its glory. Indeed, the government seems minded to go further, as at least two other recommendations of the review suggest.
The first is the proposal to jettison the central bank’s dormant power to guide or determine the lending practices of private banks — a power that could, theoretically speaking, have one day been enlivened again to assist the country’s transition to a low-carbon economy.
The second and arguably more profound is the proposal to abolish the government’s post-war Chifley power to overrule the Reserve Bank’s decisions on interest rates, including in times of crisis: “While no Australian government has used these override powers, there is the possibility that established conventions cease to be observed,” the review states, without citing any evidence.
But this ignores the point of the power, which is to provide some level of democratic oversight and residual control over one of the most significant and powerful policy settings in the country.
“Political power, its management and employment in office, must, in a working democracy, take precedence over any subordinate bureaucratic structure,” former prime minister Paul Keating told the ABC.
“The RBA has always suffered from institutional inertia — it was always too slow in lifting rates to manage bursts of activity, as it has been in getting rates down as activity moderated.”
Greens treasury spokesperson Senator Nick McKim was of a similar view, characterising the recommendation as the “final capitulation to neoliberal groupthink” and one that would mean the government lacked any “recourse over an RBA board that goes rogue”.
“[This] would totally cede monetary policy to the central banker’s club that has done nothing to stop rising inequality or the breakdown of the planet’s climate,” he said.
Taken together, the recommendations formally deprive the central bank of some of its historical roles, pushing it further into a territory where, according to Hail, it’s seen as little more than the putatively independent though soon-to-be unaccountable “arbiter of the target cash rate related to inflation”.
All of which brings to the fore the thorny and painful implications of the Reserve Bank’s refashioned role in the lives of thousands of ordinary Australians.
Perhaps the most important point is that even if its inflation model worked precisely as theorised, it’s something that inexorably exacts a high human cost. The permanent or “natural” rate of unemployment the Reserve Bank says it requires to suppress wages and inflation is already a testament to this reality, as is the blunt tool it brandishes against low- and middle-income earners to keep the unemployment rate between 4–7%.
The reason the Reserve Bank jacks up interest rates when inflation climbs too high, to be clear, owes entirely to its desire to cool the economy, which is just a euphemism for lowered demand achieved via thousands of job losses and real wage cuts for the rest.
Commonly lost in the Reserve Bank’s rhetoric, however, is the uneven impact of its rate rises, which invariably and disproportionately affect low- and middle-income earners, particularly young people with mortgages and, not least, renters across all generations.
In the 12 months since the central bank started raising interest rates, rents have soared on average by 10% — far exceeding the general rate of inflation, which was 6.8% in the year to February.
Among those renting, it bears emphasising, are the working poor and the welfare recipients, including those on JobSeeker, whether transitory or notionally part of the Reserve Bank’s Orwellian pool of the permanently unemployed. On current forecasts, hundreds of thousands more are destined to join the ranks of the latter in coming months as the full impact of the Reserve Bank’s war on inflation rears its ugly head.
Which at this juncture says something altogether tragic about the Albanese government’s philosophical approach to the economy and society. On the one hand, it has thrown its political weight behind a monetary policy that necessarily condemns hundreds of thousands to JobSeeker and many more to the brink. At the same time, it has refused to raise JobSeeker and like allowances to the poverty line — lest it be inflationary — but so too refused to jettison its stage three tax cuts.
The circuity of this thinking would, on any view, be quaintly amusing were it not for its heavy human consequences. There are, of course, some who still hold to the altogether charitable narrative that Labor is merely playing the kind of small-target strategy the politics of today demands. But these considerations, coupled with its absence of any credible housing policy, yield a different tale.
The political chapter unfolding before our eyes tells the story of a once progressive party now so comfortable with pathological levels of inequality that it risks becoming institutionally engraved onto its soul.
As Hail put it: “Margaret Thatcher was once asked to give her greatest achievement, and she said Tony Blair. And now I think she could equally have said the modern Australian Labor Party.”
Will anything come of the RBA review? Has Labor lost its way? Let us know your thoughts by writing to letters@crikey.com.au. Please include your full name to be considered for publication. We reserve the right to edit for length and clarity.
