Business

Independence for the RBA

Kieran Salsone

UPDATE 2:30 The RBA has cut the official cash rate by 50 basis points, bringing it to 3.75%

Independence for the RBA

TODAY, all eyes will be on the Reserve Bank amid speculation that the cash rate will be eased by at least 25 basis points.

The RBA has often faced pressure from politicians and business leaders to reduce interest rates. But it seems that the objectives of politicians and independent monetary policy-makers are not always in agreement. Is there a way for the RBA to arm itself against meddlesome political rhetoric?

Ben Bernanke, chair of the US Federal Reserve, announced recently that the Open Market Committee would publish its views on future interest rates. This move towards greater transparency brings the Federal Reserve into line with other central banks that publish interest rate projections, including New Zealand, Norway, and Sweden. Should the RBA adopt a similar approach?

An advantage of publishing longer-term interest rate projections is that the markets and other government departments have a clearer indication of what the future holds.

These projections are not promises; the planned path of interest rates will evolve in response to monetary conditions. Communication of the uncertainty about the plan would allow the public to gauge the odds that the current monetary strategy will require a rethink in the future.

Unfortunately, there are circumstances in which politicians and the public favour adjusting the monetary strategy to accommodate inflationary pressures, regardless of the inflation target.

The job of the independent central bank is to resist short-termism. Recently, the pressure in Australia has been strong.

"In the current economic environment, should the RBA consider it appropriate to change the cash rate, this could deliver widespread benefits for households and business - noting that a number of sectors of the economy most under strain are arguably more sensitive to interest rates". Julia Gillard (from a speech to a business audience, Perth, April 20, 2012).

"The Reserve Bank has made the wrong call consistently and compounded those wrong calls. For some bizarre reason in this country, it's like it is religious heresy to criticise the decisions of the RBA". Paul Howes (talking to ABC Radio, quoted in The Australian, April 11, 2012).

And the chair of industry funds management, Garry Weaven, added further to the pressure. "At the end of the day, no-one is truly independent. If the requirements, both for the government and for the Reserve Bank, is the greatest good of the Australian people and, in particular, the specific requirements in the Reserve Act of full employment, then, you know, on independence of thought, fine, but in the end you must take account of the full picture." Garry Weaven (talking to ABC News, AM, April 18, 2012).

The RBA would be less vulnerable to political pressure if armed with an interest rate path. Then, to be taken seriously, a critique of policy would require a new path for interest rates, justified on an alternative assessment of monetary conditions. Simple claims of "the wrong call" wouldn't suffice.

How difficult would it be for the RBA to publish longer-term probabilistic interest rate projections? Other countries, such as Norway, have found this route to be feasible.

Closer to home, the RBA Shadow Board at the Australian National University's Centre for Applied Macroeconomic Analysis (CAMA) currently provides long-term interest rate projections from individual Shadow Board members. The CAMA Shadow Board projections for Australia, which are not forecasts of actual RBA Board behaviour, reveal a considerably diversity of views for longer-term interest rates.

Some experts - like some politicians - think that the monetary stance ought to be looser in 12 months. Others are not yet persuaded, seeing rates likely to rise over the next year. The pledge of future fiscal surpluses has not been enough to convince these independent experts that rates will be lower in the longer term. A key advantage of using monetary policy experts on a board is their monetary policy expertise. Monetary policymakers should not be easily swayed by government rhetoric.

Longer-term interest rate projections offer the RBA a feasible route to greater transparency and enhanced operational independence from short-term political interference. An expert-based RBA Board would be a further improvement.Authors


Shaun Vahey

    Professor, ANU College of Business and Economics at Australian National University

Liz Wakerly

    Research Fellow, Centre for Applied Macroeconomic Analysis at Australian National University

Australia's official cash rate since 1990

Topics:  cash rate glenn stevens interest rates rba



Origins of devastating disease still unknown

A Bellinger River Snapping Turtle is assessed.

Water quality results 'good' despite more than 400 turtle deaths.

Things to do on Australia Day on the Coffs Coast

FUN TIMES AHEAD: Toormina Hotel has a big day of family activities planned for Australia Day. Check out your local venues Facebook page for details.

Coffs Coast's Australia Day activities

CLOSED: Massive clothing chain shuts down for good

Sixty-eight stores employing 560 people will close by January 31

Local Partners

From Casino to Iraq: How Shay is serving her country

WHEN Shay Maloney left Casino to join the Army in 2013, shortly after her 18th birthday, the idea of a deployment to Iraq was far from her mind.


Reconciling with stories of the past to build future

STORY TIME: Coffs aboriginal elders Aunty Bea Ballangarry and Mark Flanders hope to teach life lessons through stories.

Mark Flanders hopes stories will help shape the future

Fans invited to meet Jets at training session

FLYING IN: Catch the Newcastle Jets at the free training session at the international stadium on Thursday.

Catch up with the Newcastle Jets at the free training session

Legendary batsman opens up

STAR: Sir Viv Richards.

Cricket hero Sir Viv Richards will tell his tale at Coffs race club

Veterans of Australian film see what SWIFF is all about

Dave Horsley of the Screenwave International Film Festival, actor Bryan Brown, and Dov Kornits from Filmink at the screenwave launch at element bar.

Coffs Coast's emerging film industry ahead to a screen near you

Lion roars to straight to No 1 at Aussie box office

Nicole Kidman, David Wenham and Sunny Pawar in a scene from the movie Lion.

THE Australian-made movie a hit, while Rogue One nears record mark.

Ozzy Osbourne fell asleep during his driving test

Not a good idea to give Ozzy a Ferrari

Kristen Stewart to host SNL

Kristen Stewart will host a pre-Super Bowl episode of SNL next month

Louis Tomlinson celebrated his son's first birthday

Louis Tomlinson and Briana Jungwirth celebrate son's first birthday

Kylie Minogue will take husband's name

Kylie Minogue will take her fiancé Joshua Sasse's surname

Why investors are flocking to Moranbah

Moranbah homes are selling like hotcakes, creating a supply problem

Investors are scrambling to get into the market

Auction breaks Moonee Beach sale record

RECORD PRICE: This Estuary Dr home sold for 1.355 million at the weekend

An Estuary Dr property has achieved a record residential price

Stockland's $150m pitch: Build it and they will come

Gladstone Marina. The Gladstone Regional Council offers a range of exciting job opportunities. Photo Contributed: Murray Ware.

Here's why we need to see Stockland upgrade start soon.

Steady growth in a Coffs buyer's market

Boambee stood out as the region's most expensive suburb for houses with a $650,000 median sale price.

Lower price ranges stand out as Coffs property best sellers

Thousands of jobs part of $1b retirement village project

THIS YEAR: An artist impression of the new Aveo retirement village in Springfield.

Aveo Springfield unveiled this month, homes ready by July

Ready to SELL your property?

Post Your Ad Here!