Calling it the trial of the decade is perhaps a slight exaggeration. Over the next nine months, major global central banking themes will be addressed in the first independent review of the Reserve Bank of Australia in at least a generation. A revered institution during the country’s long recession-free period, the RBA has fallen from its pedestal. Like its peers, the bank is grappling with the costs of ultra-easy money and blames itself for missing inflationary pressures that have built up over the past year.
The World Central Bank is on trial. In Australia
Some key monetary policy concepts will be scrutinized and some overdue questions will be asked about central bank boards and their role. Are these powerful authorities saying too little or over-sharing? Are the right people sitting around the table when decisions are made? Did officials do the right thing to buy extensive insurance against catastrophic consequences at the start of the pandemic, and then hold on to it for too long? Expect tough questions about whether inflation targets with a “2” in them – hallowed scripture in global politics for decades – are doing their job. The government also wants to deepen the bank’s culture and recruitment, a nod to criticism that the bank is far too insular.
The outside panel review, unveiled by Australian Treasurer Jim Chalmers last week, has a mandate to dig deep. The terms of reference are broad: the bank’s performance, its inflation target, governance and communication. It will inevitably become a de facto referendum on recent price spikes and rapid interest rate hikes.
By implication, many central banks will be in the dock. Let’s not pretend that the RBA is unique: it has mostly been in tune with the global mainstream. In the years before Covid, for example, Governor Philip Lowe worried that inflation was too low, not too high. Officials have exceeded their target by 2-3% for years. This is exactly the kind of angst that has ravaged the Federal Reserve and led to the launch in 2020 of a new policy framework in the United States that allows rates to stay low for longer – ironically, just when the seeds of the recent inflationary spiral were sown. The European Central Bank revised its approach last year to achieve the same result.
Yes, the RBA had an enviable record as Australia has gone three decades without a recession. This superlative, lauded around the world, masked some significant concerns among senior officials about where the economy was heading and what to do about it. Quantitative easing has come under scrutiny even before Covid. Although local, the panel might as well do a bulletin on Jay Powell and Christine Lagarde.
Lowe is prepared for some sort of punch. In what was likely an effort to preempt the review, the bank undertook its own review of totemic pandemic measures: efforts to cap the yield on government debt at three years and QE bond buying. Released last month, the first results offered a touch of humility. Officials admitted they stuck with the performance cap too long and suffered “some reputational damage” when it was removed. Lowe says he welcomes the public debate the review will bring, although he almost certainly would have preferred the assessment – if it were to be external – overseen by the Treasury.
While there are currently no RBA or Treasury insiders, the three people on the panel are not economic bomb throwers either: Carolyn Wilkins, former Deputy Governor of the Bank of Canada, Renee Fry-McKibbin, professor at the Australian National University, and Gordon de Brouwer, senior civil servant. Lowe pointed out in recent public remarks that the Fed and ECB reviews recommended more flexible inflation targets, the kind the RBA already has. That’s true as far as it goes, but it’s not a great distance. Both of these assessments were conducted internally – not imposed by politicians like this one – and did not put a wide range of central bank activity under the microscope. Critics are also rising across the Tasman Sea; the Reserve Bank of New Zealand announced a review of its internal policy on Tuesday.
Lowe acknowledges that some insurance taken out against a really severe and long-lasting crisis may have contributed to the escalation of inflation. He’s not too repentant, though – the doctrine of risk management in central banking owes much to the Alan Greenspan era at the Fed. One error that weighs on Lowe and has been used as a battering ram by his detractors is the forward orientation. Even at the end of 2021, he was saying that interest rates might not need to rise until 2024. They were raised by a quarter point in May, a step that Lowe called ” business as usual,” only to change course a month later with a base 50-point hike, followed by another in July. Foresight, pioneered by Greenspan and turned into an art form by Ben Bernanke after the 2008 subprime mortgage crisis, has arguably lost its usefulness. Lowe was not convinced that high inflation would have any power. This has more than a whiff of Jay Powell’s infamous prediction last year that price increases would prove “transient”.
The RBA has lost its perch as a premier institution. For decades, that went unchallenged as the country basked — sleepy might be a better term — in a long boom. Now it’s open season. But don’t expect the ensuing debate to stay in the southwest corner of the Pacific.
More from Bloomberg Opinion:
• Now even central bankers blame themselves: Daniel Moss
• The Fed must overcome these four failures: Mohamed El-Erian
• ECB crisis plan fails to convince bond traders: Marcus Ashworth
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was Bloomberg News’ economics editor.
More stories like this are available at bloomberg.com/opinion