The RBA is in the spotlight at the moment as there’s a risk its monetary tightening will crash the housing market and broader economy. Arguably, it should have acted earlier to raise rates and to stop its quantitative easing. Even though inflationary pressures were obvious from late 2021, the Bank still insisted the cash rate could remain at 0.1% until 2024 and it continued its QE (i.e. buying government bonds with money created from thin air) until February this year (see the RBA’s Christopher Kent’s speech From QE to QT – The next phase in the Reserve Bank’s Bond Purchase Program | Speeches | RBA). Having let inflation accelerate more than it should have, the RBA now has to tighten much more than it would have otherwise.
So it makes sense the Albanese government is reviewing the RBA. Peter Tulip, Chief Economist of the Centre for Independent Studies and a former RBA and US Federal Reserve economist, has been one of the loudest and most informed voices calling for changes to the RBA. I had a great discussion with Peter on episode 149 of my Economics Explored Podcast a few weeks ago. You can listen to the episode via the embedded player below or via podcasting apps including Google Podcasts and Apple Podcasts.
I’ve cut some clips of the video of my chat with Peter and uploaded them to YouTube. First, here’s Peter explaining why the RBA review is necessary – i.e. among other reasons, other central banks are regularly subject to review and Peter thinks the RBA has made some big monetary policy mistakes in recent years, keeping interest rates too high before the pandemic and costing the economy hundreds of thousands of jobs.
In the second clip, Peter talks about his main recommendations for the RBA which he hopes the review will pick up.
In Peter’s words:
“Number one, we want more monetary policy experts on the board.
Number two, we want those members to be individually accountable. That means public votes and public explanations of decisions.
And third, the bank needs to be more open and transparent. And, in particular, it needs to give clear reasons for its decisions, and why alternatives are not taken.”
Peter also would like an explicit full employment target and clear direction from the government regarding whether the central bank should target financial stability (e.g. where it could have higher interest rates to prevent households accumulating too much debt). Peter thinks the RBA has gone wrong when it was too worried about financial instability, and it should leave that job to APRA. I’m unsure I agree with Peter on this, but I do agree the government should be explicit regarding what it wants the RBA to target.
Incidentally, the RBA review was the subject of an excellent panel session at the Conference of Economists in Hobart last month, one of the best conferences I’ve ever been to, despite it having been a super-spreader event at which I picked up COVID. Panel member ANU Professor Warwick McKibbin, a former RBA board member and one of the world’s leading macroeconomic modellers, suggested that the monetary policy rules for the RBA will need to accommodate (i.e. look through) any increases in prices coming from greenhouse gas mitigation policies. The prices of many products will need to rise to bring about greenhouse gas mitigation targets. It would not be appropriate for monetary policy to target these price increases, and it would be counterproductive, as it could deter necessary investment in low-emissions technologies in Warwick’s view. This is certainly an issue for the RBA review to consider.
Of course, we still don’t know exactly what explicit or implicit carbon taxes Australian industry will be facing over coming decades yet. The Parliament has passed a 43% emissions reduction target by 2030. But we don’t know the details of how this will be enacted and to what extent it will be enforced through the so-called Safeguard Mechanism, under which big polluters would need to buy Australian Carbon Credit Units to meet their obligations. This is a way of imposing a carbon price or carbon tax without explicitly imposing one. I pity Chris Bowen, the Minister for Climate Change and Energy, who has to implement the government’s overly ambitious policy, which appears politically suicidal in the long-run to me. It’s not enough to satisfy the Greens but could impose large enough costs that it loses votes in the centre. Bowen was on Katharine Murphy’s Guardian Australian Politics podcast recently and noted he’d be releasing a discussion paper on how they’ll implement the target very soon. Expect the climate war to start up again after that paper is released and the costs to industry and households of greenhouse gas mitigation become clearer.
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