The Reserve Bank of Australia has failed to meet its inflation and employment target for what will soon be a decade.
It has a list of excuses a kilometre long why this is the case.
In the appearance of RBA Governor Philip Lowe and his Deputy Guy Debelle before the House of Representatives Standing Committee on Economics, the RBA was starkly exposed as a closed shop, pigheaded on policy and largely unaccountable.
Andrew Leigh, the Deputy Chair of the Committee, asked the RBA a number of simple and transparent questions to tease out the policy errors, whether there was something more it could do and what sort of accountability it should take for the extra tens of thousands people unemployed as a result of its failures.
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When it came to whether the RBA could be doing more to help the economy, Leigh asked Lowe, quite simply:
“If you had announced $200 billion of QE [quantitative easing] on Tuesday rather than $100 billion, would your forecasts for wages in 2022 be higher or lower?”
In other words, would easier monetary policy help the economy?
As Lowe squirmed, he answered by saying that the effect of easier monetary policy would be “marginal”.
Not that it wouldn’t work or help, because he noted that a larger volume of QE would see a lower value for the Australian dollar and lower bond yields, crucial issues that support growth and jobs.
This admission from Dr Lowe was remarkable. The RBA’s own forecasts released later that day were for the unemployment rate to remain above 5 per cent for several years, for inflation to remain below the bottom bound of the 2 to 3 per cent target range and for wages growth to remain moribund at 2 per cent or less.
If the RBA was fair dinkum about economic growth, employment, wages growth and its inflation target, it would implement a monetary policy stance that fast-tracked the return to full economic health. More QE is but one option.
In a telling insight on the RBA’s own research on the issue, former senior RBA official, Peter Tulip, tweeted that the RBA’s bond purchases (QE) had lowered the unemployment rate by 0.3 per cent and raised the inflation rate by 0.2 per cent.
Lowe’s claims a mockery
There was the proof that easier monetary policy works.
Which makes a mockery of Lowe’s claims that the impact on the economy for easier monetary policy would be ‘marginal’ and seriously brings into question the functioning of the RBA when the economy is still lurching from its deepest recession in 90 years and is being dogged by high unemployment, low wages growth and worryingly low inflation.
Lowe went on: “If $200 billion [of QE] would do that [raise wages growth and inflation], you could make the same argument for $300 billion, $400 billion or $500 billion.”
At this point, Leigh interjected: “Until eventually you're in your target band and achieving your mandate.”
Debelle chimed in: “Yes, you're right.”
There you have it. The two most senior people at the RBA acknowledging that easier monetary policy would help the economy and ensure the RBA meet its goals.
This is the crux of the issue for the handful of people critical of the RBA for its policy failures not just since the COVID-19 pandemic emerged, but well before that.
Debelle then outlined some of his concerns about the economic modelling of the impact of easier monetary policy. It was a fair assessment, noting that all modelling is imperfect.
But Debelle did nothing to counteract the finding that easier monetary policy works, even if there are some uncertainties about the size of those benefits.
Leigh then probed further, asking what in many ways is the obvious issue: “surely the downside risk of this is less than the upside potential of getting us back to full employment faster”.
He went on: “You're not seriously telling me, Dr Debelle, that if you went from 100 billion to 200 billion, suddenly the sign would flip and the impact on inflation and wages and jobs would be negative?”
Now it was Debelle’s turn to fluff and flounder. “No, but it's also possible you get minimal pass through it all. I'm not saying it would be negative, but it's plausible that you get very little at all. And there are other consequences.
“If we end up with a dysfunctional bond market, that creates issues for the government down the track and its ability to finance itself.”
This was an extraordinary admission for a senior central banker, who some are suggesting will be the next Governor, that the RBA policy actions could upend the bond market and raises concerns about the government borrowing.
This is not the experience anywhere around the world or indeed, a risk any bond analyst is talking about, even in extreme circumstances.
“Bizarre” is the term one mentioned anonymously, unwilling to be quoted for fear of retribution from the RBA.
Leigh then asked a very important question about the medium to long term role of the RBA and its inflation targeting.
“[US Federal Reserve Chairman] Jay Powell has recently said he'll tolerate, or maybe even induce, a period of above average inflation in order to ensure that average inflation is consistent with their target.
“Would you take a similar approach—tolerating a period of above three per cent inflation in order to offset the recent period of below two per cent inflation?”
Embarrassingly, and showing the lack of planning from the RBA, Governor Lowe squibbed the question. He admitted that the “truth is I haven't thought too much about that.”
The reason he gave is because inflation is so low now. “We are struggling just to get inflation back to two per cent … But we are talking about things that, on current forecasts, are five or six years away.”
RBA has missed its targets for years
The RBA is doing little to change this outlook and failure.
Leigh then tried to work out what had gone so badly wrong at the RBA. Why there was year after year after year of failure and there was little attempt to fix those mistakes.
It is an important question.
Leigh asked: “Within the bank, there is little contest of ideas. As we discussed at the last hearing, the bank hasn't made an external appointment at the senior levels since the Spice Girls got together [30 years ago].
“You are one of the more insular central banks in the world, with many of your senior staff having spent their entire careers within the organisation—an approach which, if it were to persist in a private sector organisation, would surely see that organisation fail. Your board are in their 60s, with only one monetary policy expert appointed outside.“
Lowe, seemingly taken aback, was on the defensive. He suggested “it's wrong.”
He noted that the head of Corporate Services was an outside appointment, as was the head of economic analysis.
It was a poor answer with poor examples of those promoting “a contest of ideas” to senior policy roles.
The Corporate Services role is obviously outside the scope of economic policy and the head of economic analysis is only a middle level role, despite the title. Leigh was correct.
As Leigh tried to judge the accountability of the RBA when it fails to meets its objectives, he asked Lowe: “You also don't face consequences if you undershoot your target band, as best I can see.
“What do you think the consequences should be for the Reserve Bank if it persistently fails to meet its central mandate? Is it enough that we come and ask you questions every six months?”
Even when the RBA misses its targets and costs many Australians their business and employment opportunities, Lowe reckoned that “I'm explaining myself to the population all the time.”
He added: “I'm explaining every month, sometimes more frequently, what we're doing, why we're doing it and how we're achieving our objectives to the public.”
The consequence of policy failure is to answer lots of questions.
In all, the exchange exposed the RBA for it poor structure, poor thinking and poor results.
There seems little doubt a major revamp of the RBA is needed and the sooner this happens the better.
New thinking, a commitment to its targets, accountability are the key objectives of any reform.
Now it’s over to Treasurer Josh Frydenberg to get the RBA working in the national interest.
Read the full transcript of Philip Lowe and Andrew Leigh’s exchange here.