The RBA has arguably not faced such political and public scrutiny since at least 1989 when the cash rate hit 17 per cent.
In the wake of the ultimate pandemic stress test, the Reserve Bank of Australia’s monetary policy apparatus will be put under the microscope by an independent review, just as it aggressively raises interest rates to clamp down on surging inflation.
Lost in the debate is that Chalmers as shadow treasurer committed to the RBA review in April last year, before any major inkling that the central bank’s interest rate prognosticating would turn out to be so wrong.The case for the review last year stemmed from criticism that the RBA had undershot its 2 per cent to 3 per cent inflation target for five years before the pandemic and kept unemployment too high – the opposite problem to the high inflation fight the bank is now facing.
“It’s good practice and housekeeping, and the breadth of the terms of reference are entirely appropriate,” Parkinson says. Treasurer Jim Chalmers says the government must help the Reserve Bank of Australia reduce inflation, not only by trimming spending but also by unclogging supply bottlenecks.Outlook Economics director Peter Downes says the pandemic has been a “stress test” for the RBA that has exposed institutional shortcomings.
“It’s unavoidable you have to look at these eye-watering losses because public officials can’t just lose that amount of money without some accountability,” Downes says.Foreign central banks are also nursing big losses. The bank’s communication will also face review. Inflation has risen more sharply than almost anyone expected, exacerbated by the unforseen war in Ukraine driving up energy and food prices and ongoing supply chain disruptions from China’s pandemic restrictions.
“It was a very difficult set of circumstances that the bank was operating [in], and they did, to their credit, say that they couldn’t see a case where the rates would rise, but they didn’t actually sell the message very clearly.“Communication was a problem. I think the messaging was not quite the way I would have done it.”
Some have asked whether there should be more trained economists on the monetary policy committee, as in the case of the US Federal Reserve and the Bank of England. Academics who helped instigate the review argue yes, but cynics retort they just want more slots for themselves and their peers. “I think we should have a mix of experts with business experience but also academic and other financial experience,” McKibbin told the ABC’s“One of the problems you have is the bank was constructed with the board being representatives from different parts of society.“The problem with that model is they have sectorial interests when in fact, monetary policy is about national interests,” he said.
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