RBA walks tightrope on rates, economic activity

No government body should be above scrutiny; and if the review of the Reserve Bank of Australia’s performance, governance and mandate – the first in 30 years – can help improve its operations, it should be to the benefit of the economy and living standards. Jim Chalmers unveiled the terms of reference for the review on Wednesday, promising it would be about “renewing and revitalising the central bank, not revolutionising it”. At the same time, Anthony Albanese waded in on the issue of interest rates, warning the bank not to “overreach” in lifting them to tame surging inflation. Sharply higher borrowing costs would place “real pressure on people”, the Prime Minister said. Mr Albanese spoke after RBA deputy governor Michele Bullock said “as a whole, households are in a fairly good position” to withstand more rate rises.

In a speech to The Australian Strategic Business Forum in Melbourne on Wednesday, RBA governor Philip Lowe estimated that rates at 2.5 per cent could be considered the “neutral” level, which was neither stimulatory nor restrictive. But it could rise higher “if inflation expectations shift higher”. The current RBA cash rate is 1.35 per cent. With rates set to climb as early as next month, Dr Lowe said he was focused on bringing inflation back to the 2-3 per cent target range while “keeping the economy on an even keel”. That is a balanced, sensible objective.

Mr Albanese is not the first prime minister to comment publicly on how the central bank should act. Nor will he be the last, Rich Insight principal Chris Richardson says. But the central bank’s independence was “incredibly valuable” to Australians, Mr Richardson said, and all prime ministers “need to be on their best behaviour when saying anything around interest rates”.

That independence must be preserved, whatever the outcome of the review of the RBA, for which the government has recruited three independent experts. They are Canadian central banker Carolyn Wilkins, Australian National University economics professor Renee Fry-McKibbin and former Treasury official Gordon de Brouwer, who previously served on the RBA. The RBA’s 2-3 per cent inflation target should be retained. As Dr Lowe said, “In most other countries that have reviewed their inflation targeting arrangement, they’ve come to the conclusion a flexible inflation target centred somewhere around the 2 per cent mark is the best we can do.” Opposition Treasury spokesman Angus Taylor backed the status quo, while the Treasurer expected it would remain the “bedrock” of the RBA’s monetary policy but he had “an open mind” to change “and other perspectives”.

While Dr Lowe admits a degree of over-stimulus during the pandemic had contributed to the inflationary challenge, he defended his board’s “very strong insurance mindset” during the unprecedented health crisis. But the review will need to examine how and why the board got it so wrong last year when it repeatedly assured Australians that interest rates were unlikely to rise until 2024. That forecast prompted some homebuyers and investors to borrow big, further fuelling property prices.