RBA should reserve its wisdom for economics

You could have knocked me over with a feather, but there it was in the Melville lecture delivered by Reserve Bank governor Philip Lowe.

“I want to emphasise that the discretion we have and our broad mandate to promote the economic welfare of the Australian people do not constitute a licence for the Reserve Bank board to pursue or advocate economic policies outside our area.”

Hallelujah. I’ve been saying this, but the message hasn’t been getting through. In the meantime, Lowe has been offering up views on all manner of economic policy issues, mainly as part of the Q&A sessions that are part of the many speeches he gives.

He has told us the government must spend more on infrastructure; recommended a public sector wage push to accelerate wage growth; argued against cutting immigration because of some presumed impact on innovation; suggested transport links are the key to accommodate rapidly growing cities; and exhorted companies to lower their hurdle rates of return when considering investment proposals.

The deputy governor claims climate change as his specialty. Evidently we are expected to ­believe climate change is already affecting the conduct of monetary policy, although we are none the wiser about the direction of the effect. Are cash rates higher or lower because of climate change?

So why does it matter that the governor and his senior leadership team have been prepared to freelance on topics well beyond central banking?

The first reason relates to the undermining of the credibility of the Reserve Bank, when what the public really needs is sober and restricted commentary.

The second reason is also ­important — the mere uttering on certain topics by senior bank officials is picked up in certain parts of the press as endorsing particular policy stances on which the government should immediately act. Failure to do so is seen as failure to accept the best advice, no matter how vague and lame the bank’s suggestions.

If that is not depressing enough, last month the Queensland government referenced Lowe’s advice to boost public sector wages to promote wage growth as an excuse for paying unjustified and unaffordable bonuses to its bloated public service.

I look forward to Reserve Bank senior managers embracing this limited licence in relation to their public utterances.

Having said this, an ongoing conversation about the core central banking issues is critical as cynicism grows in relation to the net benefits of ever lower cash rates. A series of core questions must be answered in relation to the consequences of lowering the cash rate three times this year to the historically low 0.75 per cent:

Have retail sales picked up? Has there been an impact on business investment? Has the pace of economic growth quickened? What explains the persistent failure to reach the bank’s target rate of inflation of 2 to 3 per cent?

In thinking about those, the bank might take into account the impact on the public’s psyche of pushing the cash rate so low. In keeping with Robert Shiller’s book Narrative Economics, one possibility is that such low rates are interpreted as being a bad sign about the future of the economy. Instead of encouraging consumers and investors to spend, low interest rates are construed negatively. The response is for spenders to tighten their belts and wait until things improve.

Another possibility is that it is not so much the cost of loans that is critical to the course of economic growth but, rather, the availability of credit. Following on from the royal commission into banking, financial institutions have tightened credit assessment procedures, making it more difficult for some individuals and businesses to secure loans or loans of the preferred amount.

It is hardly surprising the banks react this way, both in response to existing and proposed regulatory requirements. But the effect on the economy is potentially damaging. You only need look at what has happened to new car sales to see the impact of ­restrictions on credit.

Arguably, it is too early to tell whether the lower interest rates will boost the economy, but it would appear that the impact on asset prices, particularly housing prices, has emerged already.

Indeed, Lowe admits very low interest rates inevitably will push up asset prices while the ­effect on real economic growth is less clear.

This raises the sticky issue of the distributional impacts of the conduct of monetary policy. Whether the bank should take these distributional conseq­uences into account is unclear, although one of its legislated ­objectives does cover contributing to the welfare of Australians. This consideration mattered less when the cash rate was about 5 per cent; it is more of a consideration with the rate at 0.75 per cent.

Low interest rates hurt savers while helping borrowers. Savers tend to be older people. The effect is to spur savers to seek higher ­returns in riskier assets, which can end in tears.

Also by pushing up asset ­prices, those with assets and those who can afford to purchase assets are made better off while those without assets suffer. The net ­effect is to make the distribution of wealth more unequal, something that might bother the good folk at the Reserve Bank.

No one is saying that being a central banker in these turbulent times is easy, but sticking to your knitting is usually a good starting point. We have entered a period of experimentation with low interest rates and that period of experimentation may become even wilder if the Reserve Bank ­decides to embark on quantitative easing.