Public ideas


The politics and economics of reserve bank independence

In one of his last public appearances as Reserve Bank Governor, Philip Lowe fronted up to the House of Representatives Standing Committee on Economics last week.

His opening statement, mounted on the Bank’s website, is unremarkable: it’s a defence of the RBA’s anti-inflation crusade, summarizing the Bank’s statements over the last 15 months. He also has some comments on the coming changes to the Bank’s governance, noting that the presence of the Treasury Secretary on the central bank’s board is not a common practice in other countries – hinting that he had hoped the review of the bank would have discontinued this arrangement.

The ABC’s Gareth Hutchens reports on the questions the committee put to Lowe. Independent MP Allegra Spender asked him if there was anything that could make the RBA a more effective economic institution. Lowe admitted that monetary policy is blunt and uneven in its application. That’s hardly radical – it’s standard Economics 1 fare – but it’s rare to hear it from a central banker. His more radical departure from economic orthodoxy was to suggest that there could be better ways to manage inflation.

Such ways would involve more coordination of fiscal and monetary policy, he suggested. But he understood the political attraction for the government in having an independent central bank. (Imagine the political cost to the government if the 12 interest rate rises between May last year and June this year had been made by the Treasurer.)

It’s a pity that his response to Spender didn’t go further. Is the whole economics profession stuck in some established and unquestioned notions of inflation, its causes and consequences? In view of the worldwide phenomenon of increasingly unaffordable housing, should central banks be concerned with asset price inflation?

These public ideas seem to remain unchallenged.