Australia has launched a review of its central bank after the institution was criticised for delaying interest rate rises even as inflation took hold, prompting its own governor to describe its forecasting as “embarrassing”.
The review could result in the first significant reshaping of the Reserve Bank of Australia’s functions and purpose since the 1990s, when banking supervision was stripped out into a new body.
Australia’s treasurer Jim Chalmers said the review would consider the performance of the central bank, its board composition and its inflation targeting strategy.
“We face a complex and changing economic environment, and now is the right time to ensure we’ve got the world’s best, the most effective central bank,” Chalmers told Australia’s public broadcaster ABC on Wednesday.
The review was announced after the RBA was blasted by some economists for keeping the cash rate — the metric used to define interest rates — at a historic low of 0.1 per cent as the economy roared out of the Covid-19 downturn.
The RBA was forced to announce a small rate rise in May during the country’s election campaign — seven months after New Zealand’s central bank acted — and as inflation hit 5 per cent.
It has subsequently raised the rate twice to 1.35 per cent after abandoning the dovish stance it maintained well into 2022. The bank is expected to introduce more rate rises in the coming months.
Philip Lowe, RBA governor, admitted in May that the central bank’s forecasting had been “embarrassing” given it had indicated that it would keep rates as low as possible until 2024. Analysts said that guidance helped to prolong a housing boom, with Australians taking on high levels of debt as inflation rose.
“We should forecast this better. We didn’t,” he said.
The independence of the RBA and its inflation target have been credited with ushering in Australia’s strong economic performance before the coronavirus pandemic caused the country’s first recession in 30 years. The review will consider how the RBA reacts during times of crisis when monetary policy moves are limited.
Lowe welcomed the government’s review of the central bank on Wednesday, adding that it was possible to return inflation to the target range of 2 per cent to 3 per cent while keeping the economy on an “even keel”.
Belinda Allen, senior economist at Commonwealth Bank, said: “Unlike other central banks where a recession is required to bring inflation down, the RBA remains committed to lifting interest rates but still allowing for [moderate] economic growth and low unemployment.”
Australia’s unemployment rate hit a near-50-year low of 3.5 per cent in June.
The review will be conducted by Carolyn Wilkins, an external member of the Bank of England’s financial policy committee and a former senior deputy governor of the Bank of Canada, alongside Renee Fry-McKibbin, an economics professor at the Australian National University and former civil servant Gordon de Brouwer.
Source: Economy - ft.com
