RBA: More Than a Monthly Forum About Interest Rate Settings

The AIM Network

2 years ago

By Denis Bright

The electorate rightly expects the Labor Party to shake up the ideological corridors of power after almost a decade of government by the federal LNP since Tony Abbott’s initial victory on 7 September 2013 with that landslide net gain of eighteen seats.

Labor insiders know that Labor has been able to secure really a long-term government only during the Hawke-Keating years (1983-96) with the Curtin-Chifley era (1941-49). On other occasions, Labor years have been single-term or two term wonders that ended in a shuffle back to the LNP or its historical predecessors after some major calamity arising from external factors or internal leadership or constitutional crises.

This time Labor is clearly striving for a repeat run of a long-term government. The mainstream media’s coverage of the Labor Government’s decision to reform the RBA has been months in the making and shows the responsible caution of a government that is committed to long-term changes (Treasurer’s Media Statement 20 July 2022):

The Treasurer, the Hon Dr Jim Chalmers, announced the Review of the Reserve Bank on 20 July 2022.

The Review was designed to ensure that Australia’s monetary policy arrangements and the operations of the Reserve Bank continued to support strong macroeconomic outcomes for Australia in a complex and continuously evolving landscape.

The Reserve Bank assisted the Review Panel in a number of ways, with individual and group discussions, and the provision of information in response to questions. Staff were also invited to make public and private submissions, respond to a confidential survey and participate in focus groups.

As Treasurer, Dr Jim Chalmers has helped to open up discussions about the complexity of RBA structures. Awareness of these structures is essential for effective media coverage of the operations of a central bank.

Our economy should be a major independent global player befitting a potentially rising star on the international scene. Australia will soon eclipse Italy in the top ten of world economies. Even today, the Australian economy generates half the output of France or Britain.

This Australian economy needs to diversify and develop a more independent financial sector with closer ties to Asian and Pacific countries. What a contrast to the All the Way With the USA economic diplomacy of the successors of Robert Menzies with the support of the Murdoch Press and Sky News Networks.

Understanding the Emergent Structures of the RBA: Important for Media Analysis of Our Place in Global Geopolitics

Unfortunately, press releases from the RBA retain an emphasis on monetary policies which are only a component to the RBA’s potential influence on Australian economic diplomacy through bank structures with the support of DFAT and the PM’s own Office of National Assessments (ONA).

There are many positives in the RBA’s Fit for the Future Recommendations which were presented to the government last month and released to the media on 20 April 2023 (Preamble to the RBA Review):

The Australian public can be confident that Australia’s monetary policy framework is broadly fit for purpose and that the RBA is a high quality, effective institution. We have identified 4 ways the governance, monetary policy framework, culture and systems of the RBA should be reinforced.

The monetary policy framework is fundamentally sound but should be more clearly defined and regularly assessed for updates.

Monetary policy decision making should be strengthened, drawing on more expertise and with processes that promote deeper contestability of ideas.

The RBA should become more open and dynamic, through new internal structures and approaches.

The RBA’s corporate governance should be strengthened, with contemporary governance structures that better manage risk and drive change.

Commitment to price stability and full employment receives 256 mentions in the RBA Review. Painful upward adjustments in interest rates may become less significant in a more diversified Australian economy with its links to Asian and Pacific countries. This is always the goal of progressive Labor Treasurers.

In the post-1996 era which has largely been under the direction of the federal LNP, the RBA Review noted that monetary policies have always received a higher priority over the broader goals of the Reserve Bank Act 1959:

The Reserve Bank Act 1959 (s 10(2)) directs the Reserve Bank Board to conduct monetary policy in a way that, in its opinion, ‘will best contribute to: stability of the currency of Australia; the maintenance of full employment in Australia; and the economic prosperity and welfare of the people of Australia. ’Since 1996, the Reserve Bank Board’s approach to meeting these 3 objectives has been agreed upon with the Treasurer in the Statement on the Conduct of Monetary Policy. The approach is ‘to focus on price (currency) stability… while taking account of the implications of monetary policy for activity and levels of employment in the short term.’

The post-1996 strategies have still produced good results for the Australian economy in comparison with other developed economies.

Striving for excellence is a hallmark of the current Treasurer. In the media savvy world of contemporary politics, political campaigning is embedded in every effective political news interview. The need for soggy campaigning literature in letterboxes is lessened by good professional news reporting which can undermine the appeal of far-right populism in those many disadvantaged urban and regional electorates which still cling to the federal LNP particularly in Queensland and Regional NSW.

My only suggestion from the Treasurer’s good news media forays is to open up the varied structures of the RBA to coverage of the bank’s roles in contemporary economic diplomacies in this America First Era. At least, volatility on global markets has moderated in the transition from the COVID-19 era as measured by the VIX Chart where negatives are a good sign of market stability. However, market volatility changes by the hour and a correction could come any day. Expect more forays of market volatility in a failing US economy with its enormous social divides.

However, American First strategies carry global weight because of the sheer size of the financial outreach of the US economy. Going All the Way with the USA is a dangerous strategy for Australia and is probably our greatest security risk.

Should the Republicans win control of the White House in 2024, readers can expect a return of a Reaganite style of economic diplomacy based on high interest rate strategies to vacuum global capital flows into US markets. In this Reagan era, the Aussie dollar dipped below 50 cents during the mid-1980s (Trading Economics):

Trendlines in the Value of the Australian Dollar to the Greenback (AUSUSD) and Comparisons with the Exchange Rate of the Chinese Yuan (USDCNY)

Important Postscript form Trading Economics 21 April 2023: The Australian dollar fluctuated around $0.671 and is set to finish the week little changed as traders weighed a hawkish view on domestic interest rates against firm expectations that the US Federal Reserve will tighten policy further next month. Minutes of the Reserve Bank of Australia’s April policy meeting showed that members were determined to do what is necessary to bring inflation back down within target. The minutes revealed that the central bank only paused its interest rate hikes this month to allow time to gather more information. Analysts suggested that the RBA could raise rates again, potentially by more than one 25 basis point increase, if inflationary pressures persist. Meanwhile, a slew of Fed officials supported the need for another rate hike to tame inflation, with St. Louis Fed President James Bullard favouring a higher terminal rate of between 5.50% to 5.75%.

In Dr. Jim Chalmers there is hope for a different future but the electorate should demand more responsible risk taking to protect our economy from forces which can generate out of control in the hands of US populists. Let’s have some more leaks on the Treasurer’s recent interactions with political elites in the USA.

As always, my comments are distributed to promote discussion. My household does not have the resources of the RBA, DFAT or ONA so my interpretations are always open to challenge from more informed and perhaps more logical sources. That’s what critical journalists should encourage unless the writing task is a straight ego trip.

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Denis Bright is a financial member of the Media, Entertainment and Arts Alliance (MEAA). Denis is committed to consensus-building in these difficult times. Your feedback by using the Reply button on The AIMN site is always most appreciated. It can liven up discussion. I appreciate your little intrusions with comments and from other insiders at The AIMN. Full names are not required when making comments. However, a valid email must be submitted if you decide to hit the Reply button.