As the nation plots its economic recovery from the pandemic, from vaccine rollouts to financial support for struggling sectors, it seems the right time to also examine the policies of the Reserve Bank of Australia.
As The Age reported on Tuesday, ALP Treasury spokesman Jim Chalmers has joined a growing group of influential economists who have called for a review into the bank’s operations in the light of its failure to meet its primary function of keeping inflation between 2 per cent and 3 per cent a year.
The target range is written into an agreement between the RBA and the federal Treasurer, but the current bank governor, Philip Lowe, has not delivered on this KPI. Consumer price inflation fell below 2 per cent in 2014 and has climbed back into the target range only on a couple of occasions since.
While low inflation has some advantages for those living on savings, when inflation is too close to zero workers cannot ask for pay rises and the economy cannot grow. Critics say the RBA should have cut interest rates much sooner to boost growth. If it had done so, unemployment would have been lower heading into the pandemic.
The RBA essentially admits it kept rates high for too long and has tried to explain where it went wrong. It was too worried about the risk that low interest rates would start a house price bubble and it failed to spot changes in the labour market and the global economy which reduced workers’ ability to push for inflationary wage rises.
Some have even called on the RBA board to quit over this bungle, but that would be an overreaction. First, the RBA is in the same boat as most other central banks of the Western world, which have struggled to raise inflation for similar reasons. Second, despite the miscalculation, the Australian economy continued to grow, albeit slowly.
Whatever the criticism of the RBA before the pandemic, the central bank has changed its policies since then. It is now determined to blast inflation into the target range and beyond.
It is committed to keeping interest rates close to zero until 2024, to pushing unemployment well below 4 per cent and to annual wage rises of 3 per cent. The central bank will ignore the risks of a housing bubble, leaving it up to the Australian Prudential Regulation Authority to dampen the market using other levers, such as setting minimum deposits and curbing loans to investors.