With the RBA delivering yet another interest rate rise this week and making life even more uncomfortable for those with mortgages and highly leveraged businesses, it is worth remembering that 30 years ago, the then Howard government removed from the Parliament its primacy in determining one of the nations’ key economic policy settings, namely the setting of the cash rate or as it is colloquially known these days, interest rates.
It did so through the so-called Statement on the Conduct of Monetary Policy (amazingly just a letter from the Treasurer to the RBA), which was a joint declaration with the RBA Governor, granting the RBA operational independence to independently set interest rates. The letter also codified the RBA’s ultimate objective to target consumer price inflation, specifying that it must be kept between 2 and 3 per cent, on average, over the economic cycle (whatever that might mean).
The rationale was that monetary policy, and especially the setting of interest rates, should not be subject to the political influence and opportunism of the day. Even still, one might have expected some opposition to this arrangement, after all, our elected representatives, namely the executive (Cabinet), were willingly handing over so fundamental a responsibility to unelected experts, namely the RBA and its directors. However, the silence was deafening, in fact it became and remains to this day, accepted economic and political orthodoxy that the RBA should have the sole power to set interest rates, no questions asked. To argue otherwise is considered the ultimate heresy and one would never deign to do so in polite circles.
This rationale has spread far and wide in our public discourse, and it has not just been confined to the RBA. The Parliament has been more than happy to devolve and dilute its power and responsibility to a long list of ‘independent’ statutory bodies, run by unelected officials, who on the whole are immune from much in the way of public scrutiny, especially from the parliament, bar appearing before Senate estimates a few times a year.
Take the RBA Governor for example, whose main appearance before the Parliament is via the House of Representatives Standing Committee on Economics. At these biannual public hearings, the Governor reports on the conduct of monetary policy and general economic performance. To be fair, the Governor in more recent times has also become more prominent in the media, helped by holding a press conference after an interest rate decision, and the requirement that RBA Monetary Policy Board meeting minutes be published two weeks after each meeting. Beyond this though, the media and increasingly desperate Labor Premier’s facing re-election place the RBA under closer scrutiny than the Federal Parliament.
And herein lies the essential nub of the current problem, inflation is now at 4.3 per cent, with multiple interest rate rises by the RBA having not done much to quell the inflationary surge. Indeed, inflation is now well above and outside of the RBA’s agreed 2 to 3 per cent average over the economic cycle. By any measure, the RBA is failing in its fundamental task. What is the Parliament doing to address this and hold the RBA accountable? Well, not much. Instead, it seems content to hide behind the ‘independence’ of the RBA, lest it be seen as behaving politically and heaven forbid take accountability.
It should also be acknowledged that the RBA Governor is unfairly expected to provide commentary on something she has no control over, namely the government’s fiscal policy and expenditure, which does directly influence and contribute to inflation and hence the need for higher interest rates. This is unfair because the RBA’s responsibility is only for monetary policy, it has no control over or say in the setting of fiscal policy, that is still a matter for the government and Parliament.
The question now surely has to be asked, after 30 years of the RBA having total independence to set interest rates, with no involvement from the Parliament, is it time for a rethink on how interest rates are set in this country, and more importantly, by who.
To those who say the Parliament (executive) can’t be trusted because they will somehow not be impartial or would act in an overtly political way, the answer surely is, yes, but so what? By definition everything politicians do is ‘political’, it is why we elect them as our representatives, and it is also why we have the power to turf them out of government every three years if we don’t like what they have done.
As the English historian David Starkey is fond of saying, Churchill was a believer in having experts ‘on tap, but not on top’. In other words, the final say, and primacy over decisions should always be with the parliament and our elected representatives.
Maybe it is time for the Parliament to take back control and once again set interest rates. Such setting of interest rates would of course be based on expert advice from the RBA and Treasury, as it always has been, but it would ultimately be for our elected representatives to decide and more importantly explain the reasoning for their decisions.
It might even result in the government and parliament taking greater responsibility for addressing the causes of inflation, including government expenditure. As for those concerned about how capital and equity markets might react, once again, so what? Just like everyone else they will surely learn to adapt as they do with so many other things. After all, who is running our nation state, our elected government, or have we become so enthralled to the influence of overpaid, over-opinionated, unelected screen jockeys, that we have ceded all power to them? If the answer is yes, then we may as well all give up right now.
Finally, to those who claim the government of the day does in effect have control over the RBA because they appoint the Governor and its director. However, one should also remember that it was Gough Whitlam who appointed Sir John Kerr, who so famously confused independent thought with independent action.
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