Does the RBA boast the right credentials to steer the economy?

September 27 2021
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With the Reserve Bank of Australia likely to face its first independent review in 40 years, experts believe this could be a chance to bridge the gap between monetary and fiscal policy, but also to boost the bank’s monetary policy credentials.

Does the RBA boast the right credentials to steer the economy?

Last week, international think tank Organisation for Economic Co-operation and Development (OECD) called for a review into the RBA, noting its failure to meet key economic targets in recent years.

Just hours later, Treasurer Josh Frydenberg backed the OECD, noting he was open to a review, but one that would likely have to take place post-election.

“That is a real issue, and it’s something I will give consideration to in terms of looking at the RBA, looking at the monetary policy setting, and learning from the experience of this pandemic,” Mr Frydenberg told Sky News.

Commenting on the developments, economic policy program director at Grattan Institute Brendan Coates said there are several reasons warranting a review, including some of the more prominent central bank failures.

“Firstly, they probably haven’t done as well as they should have in the last few years, there are always benefits in hindsight, but an objective assessment of the Reserve Bank in the last few years is that it really hasn’t lived up to its objectives, it hasn’t met its targets,” Mr Coates said.

The most important target the RBA has failed to meet is inflation, essentially resulting in a decade of lost wages growth.

“Consistently low inflation basically means the economy is not running as hot as it could,” he said.

Noting that a review does not necessarily spell doom, Mr Coates highlighted the opportunities for change, including a good look at the bank’s governance structure and at the divide separating fiscal and monetary policy.

“The Reserve Bank board is an outlier. It has mainly been composed of business people who do not have a lot of expertise in monetary policy. That is actually very rare globally. Most central boards are made up of people who know monetary policy really well,” Mr Coates said.

Beyond the board, Mr Coates also sees challenges with the tool the RBA uses to manage the economy: interest rates.

“It raises the question, do central banks have the tools to manage the economy?” he said.

“That leads to questions about what role does fiscal policy play. Do we keep the independence between monetary and fiscal policy during this period?”

Noting that he does not necessarily want to see more government oversight of the RBA, what could be explored is means to allow fiscal policy to act more like monetary policy.

“Could you use more automatic stabilisers in the budget? Should the rate of unemployment benefits vary based on the state of unemployment in the economy?” he said.

The answers, Mr Coates hinted, could, in fact, lie in breaking the separation between fiscal and monetary policy, especially in times of crisis.

About the author

Maja Garaca Djurdjevic

Maja Garaca Djurdjevic is the editor of nestegg and Smart Property Investment. Email Maja at [email protected]

About the author

Maja Garaca Djurdjevic

Maja Garaca Djurdjevic is the editor of nestegg and Smart Property Investment. Email Maja at [email protected]

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