RBA inflation target: Charles Goode calls for reset

Charles Goode says over-regulation could kill prosperity and is calling on Josh Frydenberg to forge a new pact with the RBA.

Charles Goode in Melbourne. Picture: Stuart McEvoy.

Investment veteran and former ANZ chairman Charles Goode is calling on Josh Frydenberg to forge a new pact with the Reserve Bank allowing it to reduce its inflation target to as low as 1 per cent, reflecting the new realities of the global economy and ending the central bank’s obsession with cutting interest rates just to hit its outdated inflation goals.

The normally conservative and softly spoken Mr Goode has also launched a strident defence of the nation’s banking sector, arguing the Australian economy is in danger of being “immobilised by zealous regulators riding a wave of popular support” on the back of the Hayne royal commission that he says is seizing up lending.

He believes ASIC’s responsible lending rules are constricting lending, the banks have been cowed and that we are in danger of lowering individual responsibility for borrowing and ignoring the law of caveat emptor.

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“We are in danger of moving to a more regulated and less prosperous society,’’ Mr Goode told The Australian.

“Our society in my view works better when we have regulators with business experience who work with the private sector to sensibly enforce the law for the benefit of a fair and growing economy.”

Mr Goode, a former chair of Woodside Petroleum and chair emeritus of top-end-of-town corporate advisory Flagstaff Partners, believes the brakes on lending by banks for fear of being criminally prosecuted are now so burdensome that billionaires like Harry Triguboff or Sir Frank Lowy wouldn’t have been able to get their property empires off the ground if the current credit regime was around after World War II.

“A bank should be able to make a loan based on the integrity, character and willingness to work of the customer. I wonder how the post Second World War immigrants who have contributed so much to Australia, and I am thinking of the Harry Triguboffs and the Lowys and others, would have been able to grow their businesses under the current responsible lending regulations.

“They were supported by small but important loans and as they proved their success in business were granted larger loans,’’ Mr Goode told The Australian.

“I think banking is part of the private sector of the economy and the banks should be able to make commercial judgments on who they lend to, even if that person’s current income cannot at the outset support servicing the loan,’’ Mr Goode said.

Mr Goode, who has long been a key player behind the scenes and a major fundraiser for the federal Liberal Party, is calling for an end to the recent trend of cuts to official interest rates. The RBA has slashed rates to 0.75 per cent, with the market expecting rates to fall further as the central bank chases its inflation targets.

His comments come after former federal treasurer and prime minister Paul Keating told The Weekend Australian monetary policy “has run its race” and called on the Morrison government to loosen fiscal policy to stimulate the economy. “There is no more that central banks can do,” Mr Keating said. “Even if the Reserve Bank of Australia moved into the Australian version of quantitative easing, the impact would be so economically marginal as to be not worth doing.”

At the core of the RBA’s activity is an agreement by the RBA governor and the Treasurer that the appropriate target for monetary policy in Australia is an inflation rate of 2-3 per cent, on average, over time. This approach to monetary policy was sealed in the early 1990s.

Mr Goode said: “The Reserve Bank seems to me to be focused on its contract with the federal government to target inflation between 2 per cent and 3 per cent. This target was set close to 25 years ago and the world environment has changed significantly since then.”

The RBA has undershot its inflation target for five years and Goldman Sachs Australia recently argued the central bank’s own modelling of the economy suggested it will fall well short of this inflation mandate, even if it cuts the cash rate to 0.5 per cent for the next few years.

“I personally would widen the target range to 1 per cent to 3 per cent … to accommodate the new environment they are operating in,’’ Mr Goode said. “Years ago (the RBA) said that 5 per cent unemployment was full employment; now they say with changes in the world maybe it is a little lower, and yet they haven’t altered the inflation target.”

With an eye on the global and local economy, business investment and consumer confidence, Mr Goode doesn’t believe the RBA should cut rates any further, not to mention head into negative territory or trigger a potentially damaging round of quantitative easing.

“I personally don’t think they should for three reasons. Firstly, while worldwide inflation is low, it is not due to monetary or fiscal policy but due to major structural changes arising from globalisation and in particular the rise of China and technological advances. I don’t see a reduction in interest rates being able to reverse these powerful worldwide trends.

“Secondly, a further lowering of interest rates raises uncertainty in people’s minds as to the outlook and they become more cautious, especially at a time when household debt is already high.

“Thirdly, the banks are not in a position to pass on further reductions in interest rates and therefore the impact on the economy is very limited.’’ Not surprisingly, being an ex-banker and having served 20 years on the ANZ board as director and chair, Mr Goode is very concerned about the effects of the Hayne royal commission, overreach by regulators and bank bashing by politicians.

“I wonder how many people will thank the regulator when they are unable to obtain a bank loan and have to turn to a less regulated financial provider and borrow at a much higher interest rate. Our current policies are increasing the business in the less regulated and less capitalised sectors of the finance industry,” he said. “We should give the major banks time to improve their culture and get their house in order. However, we are in danger of over-regulating the banking sector and inhibiting the growth of our economy.”

He conceded there were misdeeds by the banks, but asks what other crimes could be unearthed if regulators investigated other sectors of the economy.

“If we asked other groups such as phone companies, electricity distributors, franchisee retailers, aged care providers, Centrelink and schools and so on we would probably find equally horrific stories.

“Most of the problem issues seem to have been in the financial advice or wealth management areas and these are not the main activity of banks. Anyway, the banks now are in general withdrawing from wealth management and financial planning. In regard to their main business of mortgage lending, the outcome over recent years has been that bad debts have been very low and therefore very few people have been getting into trouble from these loans.”

Mr Goode argued it wasn’t helpful for the regulators to be focusing on criminal charges against bank officers for making poor commercial decisions and claiming that they have not made responsible lending decisions.

“The threat of criminal charges against bank officers who think they are doing their job and not getting any personal benefit from their decisions, apart from maybe a slightly higher bonus, is causing great anxiety and likely to make them overcautious in approving loans.”

He has crafted his own solution when it comes to handing out the punishments.

“I think I can see where the regulators are coming from. They are saying if they fine a company this does not bring home a sufficiently strong message to the individual that their behaviour has to change. Perhaps a better approach would be to have 50 per cent of the fine borne by the company, that is the shareholders, and 50 per cent by individuals to be allocated by the board of directors between the directors, the chief executive, the executive management team, members of the division that has been found to be a fault and the general staff bonus pool.”