RBA probe bipartisan, with reservations

The Coalition says the current 2-3 per cent inflation target should be the bedrock of monetary policy, days ahead of a wide-ranging probe into the RBA’s pandemic emergency response.

Reserve Bank governor Philip Lowe. Picture: Louie Douvis

The Coalition says the current 2-3 per cent inflation target should be the bedrock of monetary policy, days ahead of a wide-ranging probe into the Reserve Bank’s pandemic emergency response of near-zero interest rates.

On Monday, Jim Chalmers said he would consult opposition Treasury spokesman Angus Taylor before launching an independent review into the performance and governance of the central bank ahead of the return of parliament next week.

A thorough review into the RBA, the first inquiry in four decades, was promised by the major parties during the election campaign and comes after what its governor Philip Lowe has described as a period of “extraordinary monetary support” to guide the economy through the Covid-19 recession two years ago.

The central bank’s pandemic-era management has come under fire, including from former treasurer and Future Fund chairman Peter Costello, who said missing the inflation surge was the “worst failure in monetary policy since the 1990s”.

Since its surprise mid-­campaign 0.25 per cent cash-rate rise in May, the RBA board has raised official rates by 0.5 percentage points at each of its past two policy meetings.

The Treasurer said reviewing the RBA “should be as bipartisan as possible” and he would have a “proper conversation” with his opposition counterpart.

Dr Chalmers said he would not be proposing “controversial terms of reference”, noting they would be broad and predictable.

“I have a fairly formed view about where this should head and as you’ll see when I make the announcement, I think people will see the terms of reference as sufficiently broad to accommodate views of people like Angus and others and so I wouldn’t anticipate big changes,” he said.

Mr Taylor said he welcomed a meeting with the Treasurer but “it’s disappointing he has left it to the eleventh hour to appropriately consult with the opposition on the RBA review”.

“It’s up to the Treasurer to ensure the treatment of this review remains bipartisan and crucial that consultation be timely and genuine,” he said.

Mr Taylor said it was essential the review be independent of the political process and focused on preserving the strengths of the RBA as an institution.

“With rising interest rates weighing heavily on the minds of Australian families and household budgets, it is essential the RBA’s mandate remain laser focused on its core purpose, which is the stability of the currency of Australia, the maintenance of full employment and the economic prosperity and welfare of the ­Australian people,” he said. “Importantly, the Coalition reaffirms our in-principle support for the 2-3 per cent medium-term ­inflation target as the appropriate framework for achieving ­medium-term price stability.”

Former RBA and Treasury economist Dan Andrews told The Australian “monetary policy does not operate in a vacuum” and in framing the review, it was important to consider the broader economic environment.

“Macroeconomic policy in Australia has been overburdened by the lack of action on the structural reform front, which has sapped our economic dynamism,” said Mr Andrews, program director of the e61 Institute. “One consequence is the productivity slowdown, which has led to a gradual decline in the neutral real interest rate, which has meant a given level of the cash rate was more restrictive than in the past.”

Westpac chief economist Bill Evans said “a sensible debate” over whether the 2-3 per cent target band for inflation was still ­realistic was needed.

As well, Mr Evans said the RBA board should always include business people rather than being an exclusive club of economists as some academics were now proposing, with their policy voting records fully disclosed.

Dr Lowe has welcomed the review as an “opportunity to learn” and for the bank “to respond on some public policy issues” but had previously pushed for a joint review by the RBA and Treasury.