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Frydenberg’s double act with the RBA was a bad look

Treasurers and the RBA have always collaborated behind the scenes, but this was the first time in many decades that the RBA governor and the Treasurer have spoken from the same podium, however briefly.

The event creates a worrying precedent. Excessive closeness with the government could compromise the RBA’s hard won independence since the early 1990s to set monetary policy.

The fact that the RBA is able to raise and lower interest rates in the long-term interests of the economy without political interference has been crucial for Australia’s record 28 years of uninterrupted growth.

Former RBA governor Glenn Stevens famously made the point in the 2007 election when he raised interest rates weeks after John Howard promised to keep them low.

Mr Frydenberg has form in trying to co-opt independent regulators for his political ends. The meeting with Dr Lowe was reminiscent of the photo opportunity last February when he prevailed on Kenneth Hayne to sit by his side when the former judge handed over his report after the royal commission into the banks. Mr Hayne’s discomfort on that occasion was excruciating.

Commissioner Kenneth Hayne and Treasurer Josh Frydenberg (right).

Commissioner Kenneth Hayne and Treasurer Josh Frydenberg (right).Credit:AAP

Dr Lowe has shown more good humour about the latest stunt but it was still not a good look. Australia must not follow US president Donald Trump, who has tried to bully the US Federal Reserve into cutting rates.

Most punters will be less concerned about whether the symbolic independence of the RBA has been slightly compromised by this bromance than by the substance of the meeting.

They want to know whether Dr Lowe and Mr Frydenberg are really as confident about the economy as they claimed to be.

The fact that Mr Frydenberg organised this unusual public meeting with the RBA is not necessarily a good sign. It could suggest he is worried that consumer and business confidence are flagging.

At the meeting on Thursday, Dr Lowe pointed to three causes for optimism: house prices seem to have stopped falling; tax cuts will soon be hitting the accounts of middle income earners; and the 0.5-percentage-point reduction in the official cash rate by the RBA is reducing mortgage repayments.

In one other bright piece of news, the Australian Bureau of Statistics released a snapshot of households finances for the 2017-18 year on Friday which showed that the wealth of the average household is above $1 million for the first time.

Sydney and Melbourne house prices do appear to be stabilising, but they are about 10 per cent lower than a year ago. Since the family home accounts for most household assets, it is likely the ABS snapshot is way out-of-date and household wealth has gone backwards in the past year.

At the same time, the bad news is that household debts are increasing and incomes are stagnating.

Indeed, the RBA released research this week showing that the growth in debt has households worried and is making all households, not just those on low-incomes, cut their spending.

That could frustrate Mr Frydenberg’s hopes that consumers will rush out and spend their tax refunds. If they do not, the government and the RBA will come under pressure to do more to stimulate the economy to prevent unemployment rising from its current level of 5.2 per cent.

Yet further spending, such as a cash splash of cheques or emergency infrastructure projects, could be seen as a sign of panic.

It could also jeopardise Mr Frydenberg’s political pledge to deliver a budget surplus. Mr Frydenberg has been lucky because the price of Australia’s exports of iron ore has surged recently, funnelling billions of extra tax dollars into federal treasury at just the right time. But the iron ore price could fall again quickly and Mr Frydenberg could see this year’s surplus evaporate.

If Mr Frydenberg refuses to spend more, the RBA could feel it has no choice but to cut interest rates even further. But if that takes interest rates close to zero, the RBA could be left with no ammunition to give the economy a jolt in the event of a financial crisis.

Given the complexity of the levers that can be pulled to control the economy, it seems extraordinary that Dr Lowe and Mr Frydenberg could truly be in “100 per cent agreement”. Australian needs more than spin from those running the economy.

  • The Herald’s editor Lisa Davies writes a weekly newsletter exclusively for subscribers. To have it delivered to your inbox, please sign up here

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