By Anis Chowdhury
SYDNEY, May 15 2023 (IPS)
The Reserve Bank of Australia (RBA)’s latest interest rate hike comes before the ink of the much-awaited review of the RBA, released on 20 April, has dried. The threat of more increases to come is a clear sign of an emboldened RBA as the government accepts all of the panel’s utterly disappointing 51 recommendations.
The Treasurer, Hon Dr Jim Chalmers, announced the Review in July 2022, designed to ensure that Australia’s monetary policy arrangements and the operations of the RBA continue to support strong macroeconomic outcomes for Australia in a complex and continuously evolving landscape.
The recommendations of the three-person panel, charged with reviewing the structure, governance, and effectiveness of the RBA, range from creating a separate board to make decisions on interest rates, to giving the Bank a simpler dual mandate to pursue both price stability and full employment.
The Review report fails to question the long-held taboos about inflation and Central Bank’s role in a social democracy. While the Review panel leaves the RBA’s 2-3% inflation target unchanged, it outrageously recommends dropping from the RBA’s mandate “economic prosperity and welfare of the people of Australia” and the removal of government’s power to intervene in the RBA’s decisions.
This will make the RBA more inflation hawkish, and more aggressive in its use of the blunt interest rate tool without much regard for the consequences on jobs, especially when the RBA’s full employment mandate is left vague.
Without the power to intervene in the RBA’s decisions, such hawkish interest rate hikes will force the government to cut its expenditure as it has to pay more on interest for its debts while its tax revenue shrinks when the economy slows.
Thus, the well-being of ordinary citizens, especially those who will lose jobs, will worsen as the government struggles to find money for targeted budget support. No wonder the Treasurer termed the latest RBA interest rate decision as “Pretty brutal”.
Voodoo of 2-3% inflation target
In accepting the RBA’s current 2-3% inflation target, the Review panel ignores the fact that the 2-3% inflation target has become a “global economic gospel” without any empirical or theoretical basis.
The 2-3% target was plucked out of the air and it became a universal mantra after a chance remark by the then Finance Minister of New Zealand in a television interview followed by relentless preaching.
The recommendation ignores the changed circumstance since the 2-3% inflation target was first adopted. In the wake of the 2008-2009 Global Financial Crisis, many, including the then IMF’s Chief Economist, Olivier Blanchard suggested a 4% inflation target would be more appropriate.
The inflation-unemployment trade-off relationship (i.e., the Phillips curve) has become flatter over the years due to labour market deregulations, off-shoring and other developments. This means trying to dogmatically achieve such a low inflation target would require a much higher unemployment rate as recognised by the former Fed Chair and current US Treasury Secretary Janet Yellen. That is, the interest rate must rise more steeply inflicting serious damages to the business finances, household spending and government budget.
Full employment, a poor cousin
The Review panel recommends “full employment” mandate along with inflation target. However, while the inflation target has a numerical figure (2-3%), there is no such specific target mentioned for unemployment that may be consistent with the concept of full employment. When asked during a press conference, the Treasurer said, “It’s a contested concept”.
The report mentions full employment 100 times! But does not say what it means; instead, the panel accepts the current RBA’s definition and measure of full employment based on a contestable concept of a “non-accelerating inflation rate of unemployment” (NAIRU). That is, full employment is consistent with an unemployment rate below which inflation will accelerate.
There is general consensus that models based on NAIRU are basically wrong. An article in the RBA Bulletin acknowledged, “Model estimates of the NAIRU are highly uncertain and can change quite a bit as new data become available”. Thus, James Galbraith argued for ditching the NAIRU. And an op-ed in The Financial Times concluded, “The sooner NAIRU is buried and forgotten, the better”.
Social democracy sacrificed
The panel thinks, there are too many factors that affect prosperity and welfare. So, it recommends removal of the RBA’s third mandate “economic prosperity and welfare of the people of Australia”, enshrined in the 1959 RBA Act.
Furthermore, the panel seeks to remove the government’s ability to overrule an RBA decision because it “undermines the independent operation of monetary policy”.
With these recommendations implemented, the RBA will not be bound to the commitment to build a fairer society, although economic prosperity and people’s welfare can remain as an “overarching purpose”.
A super independent RBA will have all the power it needs to use its sole weapon, interest rate rises, to keep inflation at 2-3%. The emboldened RBA will declare the consequences to its actions on the job markets as consistent with a vaguely defined full employment, and economic prosperity and welfare of the people.
It can simply assert that job and income losses are short-term pains for long-term gains, without having to provide any evidence. There are no such things as short-term pains.
For many, job loss may cause permanent damages to their mental health, self-esteem and social life often leading to suicides. IMF research shows that the scarring effects of recessions can be permanent.
Thus, the clear winner of the recommended reforms, is the RBA, not the ordinary people struggling to find decent jobs to enable them to put a roof over their heads and two square meals on their tables.
Meanwhile, the RBA’s ideological anti-inflationary fight with a blunt interest rate tool benefits the big four banks. They are “tipped to rake in record $33 billion” in profits from rising interest rates when everyday Aussies and small businesses battle rising bankruptcies and job losses.
Anis Chowdhury is Adjunct Professor, School of Business, Western Sydney University. He held senior United Nations positions in the area of Economic and Social Affairs in New York and Bangkok.
IPS UN Bureau