RBA review a reasonable idea but the timing’s just deplorable

Treasurer Jim Chalmers. Picture: NCA NewsWire / Gary Ramage

Jim Chalmers’ sweeping review of the Reserve Bank is not a terrible idea, but it could not come at a worse time for a central bank and a country in the teeth of a once-in-a-generation inflationary battle.

The ever unflappable Philip Lowe on Wednesday “welcomed” the Treasurer’s sweeping review into the RBA, but surely with gritted teeth.

The reputations of the governor and the institution he leads will surely come out of this whole exercise diminished in the eyes of the public.

The time for this review was after the central bank had tamed the surging cost of living.

Now the coming eight or so months will be at best a distraction, and at worst a damaging blow to the RBA’s already dented credibility.

The timing of the report is also off: it will come in March, likely at the peak of inflationary and interest rate woes.

Central banking is like all banking – it relies on trust to work. The moment trust is lost, the edifice collapses. For the RBA, it’s all about inflation psychology. Businesses and consumers believe consumer prices will typically be growing by about 2-3 per cent – low, but not too low, and not high enough to risk getting out of hand.

If that belief is entrenched, we can all make decisions about the future with reasonable confidence. We can invest, buy a house, take that job, and make a host of other major decisions.

For all the shortcomings of the RBA’s recent forecasts and resulting decisions, that essential trust remains.

You can see that in the fact that investors, unions and the public still believe inflation will be back about 2.5 per cent in coming years, despite suffering through the highest consumer price growth in decades.

Which is why it’s exactly the wrong time to risk undermining the reputation of the country’s most pre-eminent, independent economic institution.

As Lowe said in his speech to The Australian’s Strategic Business forum, “an important consideration is how inflation expectations and the general inflation psychology in the community evolve”.

“If inflation expectations shift up and businesses and workers come to expect higher rates of inflation on an ongoing basis, it will be harder to return inflation to target – doing so would require higher interest rates and a sharper slowing in spending,” he said. “It is in our collective interest this does not happen.”

Chalmers has repeatedly said he has a “mountain of respect” for Lowe, and insisted his anything-goes-review is not about taking “pot shots” at the central bank.

Yet the coming free-for-all will put the lie to that. Every expert and talking head will get their chance to grandstand and say why they think Lowe is going about it all wrong, how the RBA stuffed up, how they should be doing it better.

This when Lowe’s stocks are already at their lowest ebb.

It was only late last year that the governor was sticking to the line that rates would most likely stay at nearly zero for a further two years. Instead, the March quarter inflation print triggered a string of rate rises to 1.35 per cent, with predictions the key cash rate could reach more than 3 per cent by the end of this year.

The challenges ahead are myriad, and the central bank is trying to steer us through what Lowe has repeatedly called a “narrow path” to lower inflation without sinking the economy. An ill-defined, ill-timed review will do little to help that. Nine Network breakfast host Karl Stefanovic on Wednesday mirrored what everyone is thinking when he said to Chalmers: “It looks like a witch hunt; it smells like one. What are you conjuring?”

What indeed?