Expert insights into the 2023 RBA review

Garreth Hanley:
This is INTHEBLACK, a leadership, strategy, and business podcast, brought to you by CPA Australia. Hello INTHEBLACK listeners. We thought you might like this recent episode from With Interest, one of CPA Australia’s other podcasts. In this show Jennifer Duke talks to Shane Wright about the history of the RBA and what factors led up to the recent, and unprecedented, review of the Australia’s Reserve Bank.

Jennifer Duke:
Hello and welcome to With Interest. I'm Jennifer Duke, external affairs lead at CPA Australia. In this episode we're going to talk about the review of the Reserve Bank of Australia due to be handed to the federal government imminently. The economic thoughts of the leaders at the central bank including Governor Philip Lowe, are often a source of fascination for media and the public. But right now, they're the source of significant frustration and commentary for many. Predicting the future has always been a tough ask, whether you're an economist, weather forecaster or government department. And so it is for Dr. Lowe who said several times in 2021 that the most likely scenario was for interest rates to remain on hold until 2024. RBA Governor Philip Lowe: Our central scenario continues to be that the condition for a rise in the cash rate will not be met until 2024.

Jennifer Duke:
But anyone with a mortgage knows that's not exactly what happened. After 10 consecutive rises rates are now at 3.6% compared to 0.1% in April, 2022, although still well below historical highs. Joining me to discuss the RBA review and the events that triggered it is an individual who it's fair to say had a hand in this Sydney Morning Herald and The Age senior economics correspondent, Shane Wright. Welcome to With Interest, Shane.

Shane Wright:
Thank you Jennifer. I think you're being polite by having saying having a hand in it. I think I've been accused of being involved in getting it started, but-

Jennifer Duke:
I'll be the first to make that accusation.

Shane Wright:
Thank you.

Jennifer Duke:
Now you've got a long history of writing about the RBA. In fact, your article series on the Central Bank did spark the review that is currently underway, so what prompted you to write that series in the first place?

Shane Wright:
Look, the series in the first place was actually because we'd actually had a discussion in the office, and with senior editors about the Reserve Bank itself and how it is instrumental to economic policy in this country. But there had never been a real deep dive into its operation and whether it was hitting its key objectives. Now it's unusual that something so important doesn't get a real examination except from say the day-to-day, "Oh, interest rates are going up, interest rates are going down," which in this country, the media, that's the main focus. So we decided to take a step back and that's where we got into this situation where we were...

And it's much at odds with where people are debating the Reserve Bank now, but at the time it was about whether the Reserve Bank had had interest rates too high ahead of COVID, and for those whose memories extend beyond that of a goldfish. Pre COVID, the Reserve Bank as late as first month or two of 2019 was signalling interest rates were going to go up for fear of inflation. Except of course unemployment was about five, 5.1, 5.2 per cent and inflation had not been in the reserve bank's target for about four years, and wages growth is still really slow. So you got to this point just a couple of days after the election in 2019, where Phillip Lowe got up and gave a speech saying, "Well, at our next meeting we are going to start cutting interest rates."

So the bank had started cutting interest rates ahead of COVID to try and get inflation up, to try to get the unemployment rate down and to try and get wages growing. So a lot different to the situation we are now, but there's been some analysis of that situation that suggests about a quarter of a million people went without a job, because the Reserve Bank had stuffed up it had had monetary policy too tight. And you can look at it also in terms of wages growth. The Reserve Bank has this fantastic graph showing its forecast for wages growth from about 2012 marked against reality and never the twain shall meet, this is the Mary Celeste of forecasting. And the bank got to this point going, "Oh, my goodness we have done this for far too long, we have to change."

And they made the change, a very late change because other central banks had gone to rate cutting much earlier. So that was the debate then. And now we're into a much different debate, which is, "Oh my goodness, Philip Lowe told us in late 2021 interest rates weren't going to rise until 2024." The second most indebted households in the developed world are now going through the most aggressive tightening of monetary policy since the late 1980s. And the fear amongst a growing number of people is whether the Reserve Bank is going to drive the country into recession. And so that's really been pulled into the debate about the review, but the review itself was started for other reasons. And one of those reasons is the fact that the Reserve Bank unlike any other central bank in the developed world had not had a look under the hood since the days of $1 notes and $2 notes in the early 1980s. So it was about time for somebody to come in and go, "Look, let's have an examination," because monetary policies changed so much.

Jennifer Duke:
Your memory's an awful lot better than mine is what I will say about that.

Shane Wright:
I am much older than you though though Jennifer, so that's why I can remember these things.

Jennifer Duke:
Well, I do think it's interesting that you raise all of those historical issues as well, because I think a lot of the narrative now around the review has been focused on, like you said, the interest rate issue. When you were writing that series, which is obviously before all of the latest rate hikes what is it that you uncovered, and what were the pain points that you pointed out that led to the review do you think?

Shane Wright:
There's a large number of issues. One is around the board and for history and I am old but I'm not this old. The Reserve Bank board the way we have it, which is a bunch... You've got two members of the executive, the governor and the deputy governor plus the treasury secretary. And then you have six outside appointees, who are supposed to be drawn from the broader community that they are the choices of the treasurer of the day. This stems from Red Ted Theodore who was the treasurer of Australia during the Great Depression. And he came up with this idea of... and this was the Commonwealth Bank, not the Reserve Bank.

He wanted a board that would represent different parts of the economy. Now it was rolled by the Senate, which was held by the conservatives at the time. We get along to 1959, 1960 when the Commonwealth Bank is stripped of its central banking powers and we get the Reserve Bank. And lo and behold, Harold Holt who's the treasurer at the time says, "Right, we're going to go with a board that's drawn from the broader community."

And you look at it today and this has been one of the complaints that the board is not absolutely in touch with how the economy is working. So one of the clearest examples of this is the fact that the last trade unionist on the board was Bill Kelty who resigned in 1996. Now, one of the reasons you'd have a trade unionist on a central bank board is that unionists, especially someone at the ACTU really understands how wages are set in this country, and picks up wage pressures much earlier than most other people including business people.

And if one of your problems is that you've missed the decline or the slowdown in wages growth for the best part of a decade, and you keep making the same mistakes you might be thinking, "Well, hold on, maybe we need somebody who understands what's going on in the wage setting situation to really nail down what the problem is." So that came through the series that we did. And also because we have this effectively a board of amateurs, and I mean that in the monetary policy sense. There's one economist from outside at the moment that's Ian Harper who's on the board. None of the others have monetary policy expertise. Now monetary policy expertise it is much different to running a board or being involved in a business.

And so when you look around the world central banks have gone to absolute monetary policy experts. So our board, apart from running the bank and keeping a check on the governor also sets monetary policy. If I go to almost every other central bank in the world none of them are run like that, where you actually have either a specialist committee that sets interest rates, or the people who are on the broader committee for the bank do have a deep and a huge background in monetary policy setting. Japan's central banker is an academic, for instance, who has been around monetary policy for the best part of 40 years, we are major outliers. And then you get into how the bank communicates with the public, which has been changing.

It has changed dramatically since about 2007 when Wayne Swan became treasurer and Glenn Stevens, who was the bank governor then, they came to an agreement on say the timing of announcements of changes in monetary policy, the release of a statement explaining what they were up to, even the minutes, which are a more recent addition to the communication process of the bank.

Jennifer Duke:
From memory they used to not put out anything when they didn't make a change, there was just no statement.

Shane Wright:
And it was made the day after they'd had the board meeting. So you would wait until it was 8:30 or 9:30 the Wednesday after a Tuesday board meeting to see if there'd been a change in the cash rate. And that is something that was going on up until about 2006, 2007, it's not all that long ago. And this feeds into what's been going on across monetary policy for the best part of the last 35 years, there's been a step-down in global interest rates since about the mid '90s, it's called the Great Moderation. And we got to this point during COVID where we had I think it was a third to almost a half of all central banks had negative interest rates. And we've had the creation through quantitative easing of huge volume, huge volume of money, which is now one of the problems that they're all dealing with inflation going again.

So these sorts of debates, whether the bank's two to 3% target is the right target because that hadn't been debated, it wasn't even debated when it was introduced by Bernie Fraser when he was the governor. And then formalised between Fraser and Peter Costello when he became treasurer, there's a formal agreement, those sorts of things. And just how the bank is run we haven't had that outside examination of whether it's best practise since 1980. So there's not many institutions or businesses or organisations that go 40 years without someone going, "Oh, hold on, let's just check if we're doing the right thing."

Jennifer Duke:
Well, it's good that they're finally taking a bit of a pulse check on the RBA. I would assume that some of our listeners won't know exactly what's in and out of the scope of the review, can you go through with us what are the main elements of the terms of recommendations and what we might actually see as a result do you think?

Shane Wright:
Yeah, it's very broad ranging in terms of it's effectively everything except the arrangement between the Reserve Bank and APRA, that's the one area that's out of bounds. But you can see that having met some of the board members you can see how... the RBA is unusual in terms it doesn't have direct oversight of the commercial banking sector. The Bank of England's actually gone... they had a similar system, but they've gone back to having prudential supervision brought under the Bank of England, that's been a decision they've made in the last couple of years. So apart from that, it's effectively carte blanche in terms of what they can look at. So communications, the board, the culture and the target, they're all up... and at the end of the day they're the most important things, and that's where we are going to get to. There will be change, there's no doubt that there will be some changes. And we've seen that this week where for the first time ever Jim Chalmers has released an expression of interest for anyone to put their name up to go onto the list of potential board members.

Jennifer Duke:
Any hot tips on who you think might join that list?

Shane Wright:
I don't think I'm going to get there.

Jennifer Duke:
What a shame.

Shane Wright:
Fortunately, poor shame. But in that space even there, so we get up to 2007. Before 2007, the treasurer of the day just decided who was going onto the board, it was solely their choice. There's what is it? There's been 76 board members since 1960. I think it's something like 17 of them have been sirs, 41 of them have had an Australian honour of some sort, either public service or general service, a handful of women and three members of the ACTU. They're an unusual bunch to begin with, that's to put it bluntly. So you get to 2007 and Swan decides, "Right, we're going to have to set up a register of people."

So treasury sort of brought up this list and it's not publicly available. But he got accused by Peter Costello at the time, "Oh, 70% of the board are going to be union members from now on, he didn't appoint one." At least the treasurer had a group of people who'd been vetted in some way by treasury. Now we get to the point we are now where Chalmers has said, "Right, let's see if there are people out there who have an interest in monetary policy and have some knowledge about monetary policy, who we haven't thought of and see if they want to put their hands up." I wouldn't be surprised to see some of our international academics put their hand up to go into this. Because it gets to the broader point that I think I have a feeling the next governor of the Reserve Bank does not live in Australia right now.

Jennifer Duke:
That's a hot tip, Shane, that's a great tip.

Shane Wright:
Hot tip, I know.

Jennifer Duke:
A former-

Shane Wright:
Because you'll end going to have to-

Jennifer Duke:
[inaudible 00:16:55] or...

Shane Wright:
So Carolyn Wilkins who's one of the three board review panellists has worked both for the Bank of England and the Bank of Canada. Both of them have a system where you have monetary policy experts, set interest rates and the bank itself is overseen by a separate board.

Jennifer Duke:
That's fascinating.

Shane Wright:
And if you ever looked at say the board or the Bank of England's monetary policy committee and you look at the credentials of the people who set monetary policy, it blows your mind about these are people that is effectively all they think about is how monetary policy works. And this has been one of the complaints that an amateur board, if you've got a strong governor and they rely heavily on economic modelling and economic theory, if you've got a bunch of amateurs how do they challenge the views of that person? And that's been one of the complaints. Phil Lowe has defended the board on numerous occasions saying, "They challenge me, they have really good analytical skills drawn from the business community." And ultimately, he doesn't have a choice in who gets appointed. But the case could be made that someone from ACOS, for instance, someone from local government they might have the same skill set. But their lived experience is going to be very different to the group of people that we have on the board right now. You can see how you'll end up with say a specialist monetary policy committee. To change the culture of the bank you'll have to bring in somebody from somewhere else probably from overseas.

Jennifer Duke:
Do you think, because some of this to me goes to the purpose of what the Reserve Bank is for. And I believe that one of the elements they're required to focus on is the economic welfare of all Australian people. And right now-

Shane Wright:
The economic prosperity of all Australians that's one of the three.

Jennifer Duke:
I love that you can quote that directly.

Shane Wright:
It's one of the three charter-

Jennifer Duke:
That's right.

Shane Wright:
... requirements.

Jennifer Duke:
And I know that there'd be some people who have mortgages right now who feel as though their welfare is not being especially well looked after, and obviously they're only a portion of the public. But do you think that the criticisms that Dr. Lowe is facing right now about the high interest rates are they warranted? Do you have any sympathy for him right now?

Shane Wright:
Certainly, the Reserve Bank's got one way really to bring down inflation and it's called interest rates. And so he's got a hammer and there's a lot of nails to whack and that's what he's doing at the moment. The issues around Lowe apart from the fact it's a seven-year term. The only way you can get rid of a Reserve Bank governor is that they can only be sacked by a treasurer on good behaviour grounds. You read the act and the 1959 act is very short, and it gives absolute power to the governor of the day. But in terms of the cards that he's been dealt, which is Vladimir Putin invading Ukraine, Xi Jinping deciding that China can eradicate COVID, they are the two biggest factors around inflation. The third though is both the Reserve Bank and the governments of Australia and what they did during COVID. The government have cumulatively run deficits of more than $600 billion clearly stimulatory, and that was its aim, they're aim.

The Reserve bank created about $400 billion and took the cash rate to 0.1. So combined both the arms of government and the arms of monetary policy have contributed to the inflation problem, and so he's trying to unwind that. His argument, and it's an absolute fair defence is, "Look, we made this decision in the midst of COVID when no one knew what was really going on." And we decided to err on the side of do too much, not err on the side of due too little, which is the lesson that treasury and the Reserve Bank have taken from the 1991, '92 recession, where they went too far. Interest rates went too high and the government of the day did too little because they were fearful of what might happen. These guys decided another path, which absolutely defendable. But you get to this point of the last time Lowe said interest rates won't rise until 2024, financial markets were already pricing rate increases-

Jennifer Duke:
Yes.

Shane Wright:
... they could see that there were going to be inflation problems and the bank didn't say that. So you can understand a lot of people might have a fair bit of anger directed at Phil Lowe and the board.

Jennifer Duke:
I guess one of the other things that comes out of this is the independence of the Reserve Bank. And I know at CPA Australia there is a huge amount of support for maintaining that independence. Do you think that's really critical? Is that something that should be maintained throughout the review?

Shane Wright:
And I don't think there's any suggestion of what you would call interference. And I think we've forgotten in this country that independence also means you can get criticised.

Jennifer Duke:
Yes.

Shane Wright:
I can say there's a lot of discussion about the treasurer not taking to task the Reserve Bank governor over his performance. But at the end of the day Chalmers will make a decision whether to keep Lowe on for another two or three years or what happens to his deputy, things like that. So he actually has to keep some separation. However, if the Reserve Bank went off on a fancy and jacked up the interest rates say to 6% by the end of the year, it would be more than passing strange if the government of the day didn't say, "Hold the hell what's going on?" We've seen this in the United States, Donald Trump put extreme pressure on Jerome Powell to set interest rates differently. But independence means Powell did what he wanted and decided the country needed, he ignored the President of the United States. Now that is something-

Jennifer Duke:
Yes,

Shane Wright:
... in terms of independence. People forget, even a passing criticism of the Reserve Bank's performance is seen as, "Oh my God, you're threatening the independence of the Central Bank." No, you haven't. You're just calling to account what the bank has done.

Jennifer Duke:
That's a very good point I think.

Shane Wright:
It's not often I make very good points.

Jennifer Duke:
I always feel a lot smarter after I've spoken to you, so there's that.

Shane Wright:
Stop it.

Jennifer Duke:
The treasurer is currently asking to receive that review by the end of March, and I believe he's since committed to providing the government's response before the budget. When do you think we might start seeing these changes come into effect, whatever they might be?

Shane Wright:
Well, we've got Mark Barnaba and Wendy Craik who are board members, their terms end, Wendy's ends in May and Mark's ends in August. And the announcements of their replacements they'll be up to a month earlier. So say the replacement for Wendy Craik's position, that will give you an indication of what they're thinking. And it depends just how big Chalmers is prepared to go. So the board has suggested they'll make two sets of recommendations, ones that are relatively easy and you may not even need parliamentary approval. Another set which may be more controversial, which would open up a whole debate inside parliament. And this is where you get to should we have a separate monetary policy committee, that may require changes to the legislation. I'm not an expert in that space, and you can see that would create a fair bit of interesting political debate.

Jennifer Duke:
Definitely.

Shane Wright:
Right at the moment the Reserve Bank you and I both know the inflation target of two to 3%, but that's not set in legislation.

Jennifer Duke:
No.

Shane Wright:
One of the bank's three elements to its charter is stability of the currency. And then there's a separate side letter between the treasurer of the day and the Reserve Bank governor that codifies keeping inflation between two and 3% is the way that you maintain the value of the currency. Whether you actually have to codify that, whether you want to codify that, that is a really big discussion point, which would unleash all sorts of political debate, which we actually haven't had around the central bank for more than a generation. We've had the debate about whether the governor's doing the right thing and interest rates are going up or down, but not about the absolute centrality of the central bank to the economic debate in this country. You actually are going back to the arguments that were had in the 1930s where Red Ted Theodore lost it in the Senate and then you ended up with the Royal Commission, the Banking Royal Commission in 1936, '37, that really structured a lot of our banking. Well, Collingwood was winning premierships in the VFL at that time, and I know how much you love my sporting analogies, Jen. And they won a lot of premierships in that time.

Jennifer Duke:
I was waiting for a sporting analogy to pop up, so I'm glad that we got one.

Shane Wright:
Never to disappoint.

Jennifer Duke:
Is there something that you think above all else we should see from this review? If there's one outcome you want, what would that be?

Shane Wright:
I think you'll just see more transparency about the bank and it's decision making process. Again, we get to this point because of the structure of the board. Australians don't know how the debate played out, whether there is a difference of opinions. If I go to the Bank of England I can look and see there's a vote taken down of who voted for what, and the various board members can make their own cases. We got into this interesting point just this last three weeks where Phil Lowe came under some... I think it was unfair criticism because he'd given a private address to the investment bank, Barrenjoey, to some banking traders trying to... He does this quite often and journalists have also been tied up in this just getting an insight into their thinking.

But he got the criticism unfairly because it was confidential to the bankers. But the fairest criticism was the fact he hadn't spoken publicly between December and February when so much had gone on in the international economy and the domestic economy, which meant the Reserve Bank actually changed its attitude towards future interest rate rises. So what happened when they announced the a rate rise in February 7, everyone was going, "Oh, hold on, these guys are going to lift rates more than once going forward," so that caused some consternation.

By comparison, again, Bank of England their chief economist had given four separate speeches since January 1, giving an up-to-date read on what was going on, that included a speech on the day that inflation data had been released in Britain saying, "This is what I'm thinking right now." So it's not just the bank traders, people who've got money in the financial system, but everyday mortgage holders are having this constant conversation with the governor about what's happening. And the problem is our system means the governor is the prism through which all this communication is made. And on occasions the deputy, none of the other members of the board speak about monetary policy, which is more than passing strange given they are paid to be there to decide on monetary policy.

Jennifer Duke:
The Reserve Bank did do its own internal review I believe around its communications regarding the 2024 guidance, I guess you want to call it that. What did they find from that internal review, and does that go any of the way to helping this communications gap?

Shane Wright:
It hasn't, it seemingly hasn't, because one of the reasons Lowe said why he didn't... he has normally given an early year speech about the outlook of the economy is that, oh, he'd got feedback from one person saying, "Maybe you talk too much." So again, that tells you, hold on, maybe they still have a fair bit to learn in that space and take advice from what's going on globally rather than the insularity of what's happening in Australia. At the end of the day that's the most important thing. Lowe is off to a meeting of G20 governors and treasurers with Jim Chalmers in I think it's India this week and next.

So they do have that broad understanding of the monetary policy debate, but in terms of monetary policy around the world and how it's communicated, how it's set, these deep, really important arguments about whether monetary policy is helping or hurting economies, there still needs to be a lot more debate in that space. And I think that if you look at the research that comes out of the Reserve Bank, it is a little shy of what other central banks do. Even the review, the European Central Bank when it went through a review had a whole debate about how it deals with climate change. Will this affect the settings of monetary policy in that country? And it was a year long discussion-

Jennifer Duke:
Grief.

Shane Wright:
... across the EU. We are nowhere near at that level of sophistication or forward-looking at the moment.

Jennifer Duke:
I think that's probably all we've got time for today, unfortunately.

Shane Wright:
Oh, come on, Jen, you know I could talk for hours about the central bank.

Jennifer Duke:
I could talk to you forever about the Reserve Bank to be honest. But thank you very much to our guest Shane Wright from the Sydney Morning Herald and The Age. Links to some of Shane's reporting on the Reserve Bank will be included in the show Notes. With Interest is a weekly podcast. If you like what you've heard today, why not subscribe to With Interest on your favourite podcast app. By subscribing you'll receive notifications when a new episode becomes available. From all of us here at CPA Australia, thanks for listening.

Garreth Hanley:
If you've enjoyed this episode, help others discover INTHEBLACK by leaving us a review and sharing this episode with colleagues, clients, or anyone else interested in leadership, strategy, and business. To find out more about our other podcasts, check out the show notes for this episode. We hope you can join us again next time for another episode of INTHEBLACK.