RBA governor pushes back against review of the bank as economists say it’s time

By Shane Wright and Jennifer Duke  August 9, 2021  19  View all comments

Reserve Bank governor Philip Lowe has pushed back at calls for a formal review of the central bank as senior economists say it is time the key financial institution’s recent performance and overriding mandate is properly examined.

Dr Lowe said other central banks were moving towards the RBA’s policy approach even though the Reserve had failed to meet its 2-3 per cent inflation target band since 2015.

Labor has promised a review of the way monetary and fiscal policy interact, including the RBA’s inflation target and its overarching charter to maintain full employment and the stability of the currency.

It has been 40 years since the RBA and its policy objectives have been reviewed. Almost every other major central bank in the world, including the US Federal Reserve, the Bank of England, the Reserve Bank of New Zealand and the Bank of Japan have all conducted reviews or changed their mandates in recent years.

Pressed by Labor’s Andrew Leigh on the issue of a review at a parliamentary committee hearing last week, Dr Lowe said when people called for a review of the bank it was unclear whether they meant -
1.   its mandate,
2.   its governing legislation,
3.   the make-up of the board; or
4.   whether it was meeting its targets.

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“What I’m responsible for is how we do our job and the monetary policy regime that we employ,” he said.

“And I would observe that these various reviews that have been done by other central banks have all come to the conclusion that flexible inflation targeting is the best monetary policy regime we can have at the moment.”

Dr Leigh said he was stunned by the governor’s position.

“With many major central banks conducting monetary policy reviews, it’s astonishing the RBA — which has undershot its inflation target for at least 5 years — would not embrace a similar review,” he said.

Many economists participating in The Sydney Morning Herald’s and The Age’s six-monthly Scope survey said a review of the bank’s operations was in order.

Market Economics’ Stephen Koukoulas said the bank’s failures in areas from inflation to pre-pandemic interest rate settings meant the RBA should face a review of some sort.

“The RBA has made a series of errors in recent years, most notably missing the inflation target for six years,” he said.

“It has, recently, informally embraced a target for full employment, but this appears to be at the whim of the current management, rather than something that will remain at the centre of its objectives over the medium term.”

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Centre for Independent Studies chief economist and a former RBA economist Peter Tulip said the bank definitely needed a review.

“The case for a review of the RBA is much stronger given its persistent failure to meet its targets,” he said.

“The wording of the targets needs to change. Full employment should be an explicit objective in the agreement with the government, given equal priority to inflation. And the agreement should be explicit that financial stability is the responsibility of prudential policy, not monetary policy.”

ACTU economist Margaret McKenzie said full employment needed to be reinforced as a goal of Reserve Bank policy.

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“The relationship between inflation and unemployment has been revealed over years to be uncertain in magnitude and causality and the inflation-targeting approach to monetary policy needs major review,” she said.

Macroeconomics Advisory’s chief economist Stephen Anthony said the first question of any review should be whether the country still needed an independent central bank given monetary and fiscal policy were being carried by federal taxpayers.

But respected independent economist Saul Eslake is not enamoured with the idea of a review.

“I don’t see any compelling arguments for changing either the broad objectives (price stability and full employment) or the inflation target itself. Both have served the Australian economy and people well,” he said.

BIS Oxford Economics chief economist Sarah Hunter said the problem facing the RBA had been the shift in the relationship between jobs growth, wages and inflation.

The link between low unemployment and high wages had changed since the bank committed to its 2-3 per cent inflation target in the early 1990s.

“What is crucial is that the policy response adapts as the environment evolves, although the challenge is that identifying the change in real time is hard,” she said.