The RBA Controls The Aussie Economy: I Must Have Missed the Memo

Did you see the memo? I know I didn’t.

Maybe someone put it on my desk and now it’s lost under a pile of junk. Or perhaps a careless workmate left a door open and a gust of wind tore it off the noticeboard.

How ignorant I must be. All this time I thought the government was responsible for running the Australian economy, and now I find out it’s all the RBA’s job and nobody else’s. Boy, how did I miss that?

I can remember only too well when the RBA was just an offshoot of the Department of Treasury; when those in Treasury looked down their nose. It was when the RBA’s primary job was to print money — the real stuff, the money that goes in your pocket.

And now the RBA’s responsible for running the entire Aussie economy. All by itself. When did governments start trying to get away with that?

I can’t seem to put a time on it. There’s no mark on the calendar, no handing over of the keys. At some point the RBA was elevated to sole guardian of the economy, yet there isn’t any official mention of it.

Now where is that memo? It will explain all, I’m sure.

But how does the RBA run an entire economy with just one lever at its disposal; one potion to cure all? When all it can use is monetary policy, the blunt axe of interest rates, when sometimes you need a scalpel?

Maybe governments have forgotten that they’re responsible for running the country. That the RBA — the independent RBA — is responsible only for setting interest rates. Who can forget the furore when the RBA raised the cash rate just a week out from the 2007 election?

The RBA has been set some lofty goals. To maintain the stability of the currency, to maintain full employment and work for the economic prosperity of all. Is it possible to achieve all this with just interest rates at their disposal?

Somewhere along the way governments have forgotten about that other side of the equation, fiscal policy. That they can change the way they tax and spend. Maybe it’s just easier to play the political game; to scheme and plot and dither. Blame the Senate and let the RBA take care of it all.

Who can forget the ills of inflation? That nasty disease that erodes the value out of the very wealth we’re all trying to create. Having beaten that monkey, we supposedly now all want the RBA to bring it back again. Really?

Glenn, did you show Phil how to click that dial? Just two notches to the right and inflation will magically realign itself within the confines of the 2–3% target band. Don’t get too excited. We don’t want inflation to run away again.

If only the Governor held the economy on such a string. If only the Governor could run the entire economy by monetary policy alone.

In Glenn Stevens’ decade-long tenure as the Governor of the RBA, there have been two rate moves that really puzzled me. First, the back-to-back rate increases in February and March 2008 (from 6.75% to 7.25%). That was after the market had dropped 1,000 points in the previous three months.

Just as the world looked as though it was heading over the precipice, the RBA was jacking our cash rate up.

The second was the cut in August to 1.50%. Perhaps the feeling was more of disappointment; that the cut was forced upon the RBA as the stubborn Aussie dollar refused to roll over, while yield-hungry investors piled into our bonds.

It will be years before we know if this low interest rate gamble pays off. But what if they hadn’t lowered rates? Where would our currency and exports be? They’d all now be lining up to blame the RBA as the unemployment rate soared.

Lower rates helped Australia avoid a recession when the commodity markets fell through the floor. It boosted the housing construction industry — the biggest employer of all — when the money flowing into our massive energy and resources projects finally dried up.

New housing constructions hit a high of just over 220,000 dwellings, keeping a lid on unemployment that topped out at around 6.25% — well below any of our counterparts.

But for savers, it’s been a brutal regime. Trying to live on an ever lower income has hung many out to dry. And don’t mention it to those trying to buy their first home. For some, it feels as though someone has robbed them of their future.

In one of the few media pieces Stevens did before his retirement, he said that he’d never met another central banker he’d want to swap places with. And who could argue with that?

Being the governor of the RBA is one of the toughest jobs there is. Unless something changes on the fiscal front, how can we afford yet more naval-gazing and five-minute media stunts? Australia has already lost a decade. Surely we can’t afford to lose another.


Matt Hibbard,
Editor, Total Income

Editor’s note: The above article was originally published in Markets and Money.

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