The new Australian central banking structure will be thrown into the deep end from day one, both internationally and locally.
To illustrate, as Treasurer Jim Chalmers announced that the new structure for the Reserve Bank would embrace some of the features of the Bank of England, the UK announced that its March inflation rate remained in double figures.
In the US another interest rate rise looks on the agenda. The decisions made in the US and Europe always impact Australia.
In Australia we have a unique set of problems which was illustrated when the Commonwealth Bank emerged as being owed $33m by the failed Porter Davis building group.
The amount was token, but it was a signal of a deeper problem that will become part of the new central bank decision making.
Chalmers’ first step is encouraging. He invited the shadow treasurer Angus Taylor into the Reserve Bank structure decision making process in an attempt to take the politics out of what is a fundamental change.
It is a national tragedy that Prime Minister Anthony Albanese did not adopt the same approach in the voice referendum.
Australia got itself into the current central bank mess because a centralised statistical gathering system was set up by the Reserve Bank in one city, which happened to be Sydney, and those statistics dominated the board meetings.
Our government’s statistical gathering systems are way behind what’s happening in the real world so the Reserve Bank left interest rates too low for too long and is in danger of taking them too high and making the same mistakes in reverse.
The independent Reserve Bank directors have not had the knowledge or the boardroom force to overcome the wrong messages that have been coming out of the Reserve Bank statistical data bank, and backed by Treasury
In former times the Reserve Bank had its information gathering tentacles cleverly spread around the country and was much better informed about what was taking place and was not as bound by statistics.
The test of the new system is whether the combination of a widened board and better information gathering systems can avoid the mistakes of recent years.
In Australia, our largest home lender the Commonwealth Bank is warning the government and the Reserve Bank to prepare for a sharp domestic downturn that will boost unemployment.
That information is hard to find in the official statistics, particularly as unemployment is a lag indicator.
But consumers can sense what is happening better than economists.
For seven weeks ANZ-Roy Morgan Consumer Confidence index has been below the 80 mark – the last time consumer confidence spent at least seven weeks under 80 was during the 1990-91 recession when the index was conducted on a monthly basis.
The exposure of the CBA bank to Porter Davis, albeit small, is the first public indication that parts of our banking system have become over exposed to the troubled building industry – troubles the banks helped create by insisting that home building contracts be set at fixed price.
The CBA is now looking very closely at financial solvency of the builders that undertake work for dwelling developments where it is lending on mortgage.
Other banks are cutting their lending to builders because they fear they have become overexposed to an industry that is in trouble.
And so we have a crippled building industry at the time of a housing shortage which is contributing to big rise in rents and inflation.
High interest rates in that environment are a very clumsy anti-inflationary weapon.
The new Reserve Bank body will need to determine whether a 2-3 per cent inflation target is realistic or whether former Reserve Bank governor Ian Macfarlane is right and the first target should be around four per cent.
As the world, including Australia, moves from carbon-based energy environment to renewables and other technologies the cost of energy will rise in part because the mining industry is simply unprepared to provide the materials required for this transformation.
This will push up both commodity prices and inflation.
Demand for capital will be high.
These forces will make it difficult for the new central bank to sustainably lower interest rates to the level it would like if the CBA is right about the domestic economy.
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