What does the RBA review offer for Australians struggling with the cost of living? Not enough

In Australia, right now, we are at risk of entrenching deep inequality and further flaming the housing crisis. The major review of the Reserve Bank of Australia ” a key economic institution ” released this week does not immediately address these problems. The RBA review committee spoke with 137 people between September 2022 and March 2023. Interviewees included former treasurer Peter Costello, former RBA governor Glenn Stevens, as well as MPs like Zali Steggall and Zoe Daniel. This was all done right smack bang in the middle of one of the most aggressive interest rate tightening cycles in the bank’s history. The performance of the bank is measured by how well it sticks to its charter, which includes maintaining currency stability and full employment, as well as economic prosperity and the welfare of Australians. But given the Reserve Bank’s key role of reducing inflation to within a range of 2 to 3 per cent, by raising interest rates, remains unchanged ” notwithstanding a new focus on keeping folks in jobs ” what on earth will this once-in-a-generation RBA review practically achieve for Australians struggling every day with the cost of living? Loading… Real, tangible pain remains The RBA’s inflation target of between 2 and 3 per cent is not legislated, nor is it in the Reserve Bank’s current charter. It’s made in part by an agreement between the RBA governor and the treasurer. BetaShares’ chief economist David Bassanese says the review’s objectives changed during the process itself, tweeting “it was originally intended to review the inflation target”. “That was ruled out, so it became a solution in search of a problem,” he wrote. RBA review and recommendations explained A scathing review of the Reserve Bank of Australia is set to deliver a shake-up of the central bank not seen in a generation. Here’s what it means for interest rates, your mortgage, and RBA governor Philip Lowe. To be clear, the review didn’t suggest any changes to the target band, noting “The RBA should retain a flexible inflation target of 2 to 3 per cent and aim at the midpoint to maximise the chance that the target is met and best anchor inflation expectations.” Imagine though, just for a second, if the review recommended dropping the target as soon as practicable. It would mean an end to the Reserve Bank’s laser-like focus on increasing interest rates to lower inflation to 2 to 3 per cent and to “do what is necessary to achieve that”. In an instant, the RBA would be freed up to work on other ways of lowering inflation without hurting those who are already struggling with higher rents or mortgage repayments. But would it? Governor Philip Lowe insists he’s only got one tool to lower inflation, and that’s interest rates. That’s curious because the review also notes that “monetary policy decision-making should be strengthened to deal with an increasingly complex environment that includes more supply-side shocks and a broader monetary policy toolkit”.  Ah, so it is possible to tame inflation without taking individual households to the point of financial distress with higher interest rates. A new goal for jobs The inflation target will have a new companion though. The review found the maintenance of full employment should be given equal weighting ” in terms of the need to achieve it ” as maintaining price stability which has evolved from “currency stability” in the original RBA charter. Will the RBA shake-up leave you better off? Don’t expect the Reserve Bank review to mean lower interest rates. It may even produce exactly the opposite result. It concluded that in the Reserve Bank’s future pursuit of battling inflation, it must not do “whatever it takes” to lower inflation but also consider the cost its interest rate decisions have on the jobs market. In other words, it must be eagle-eyed on that rate of unemployment that satisfies the conditions of “full employment”. So what’s full employment, exactly? Well, Treasury “assumes” it’s 4.25 per cent. The Reserve Bank says it’s most likely in the low 4s. When asked what it was during a press conference, the treasurer replied “It’s a contested concept”. Clear as mud. Loading… Finger pointing for pain We know the rising cost of living is causing millions of households financial pain, which is also translating, let’s be frank, into genuine ongoing anxiety. This review suggests the Reserve Bank board has made enough missteps that it potentially made households’ financial pain worse than it needs to be. “The RBA’s decisive actions at the start of the COVID-19 pandemic were critical in supporting Australia through the crisis,” the review points out. “At the same time, stronger decision-making arrangements may have helped mitigate eventual shortcomings in the RBA’s forward guidance, yield target, term funding facility, and bond purchase program.” Loading… The point here is that the Reserve Bank implemented many policies in the heat of the moment that had big implications for the economy and therefore households that had not been tested. The decisions taken were risky then by nature. When the heat came down on the governor he pointed the finger at the eight other members of the RBA board, insisting he shouldn’t shoulder all the blame. But the review concluded that as chairman of the board, he didn’t create the sort of culture around the boardroom table that enabled anyone to effectively challenge him on the decisions that were being made. The finger for years of questionable RBA decisions was then pointed straight at him. He rejects the claim and says that “wasn’t his experience” in the boardroom, arguing there was indeed robust discussion, conceding only that he sometimes has the last word. The result is that the RBA board as it exists will soon be relieved of its duties to determine interest rates. The solution is to ask a more qualified group of people to make decisions on interest rates from next year instead. That is an enormous development in the history of Australian monetary policy. Loading But will it help Australians? Moving away from economics, let’s get back to the question of how this will practically help Earlier in the week, the government released another report. The newly established Economic Inclusion Advisory Committee produced a 97-page report and found it’s awfully difficult to get by on government welfare payments, like Jobseeker. The committee, led by former Labor Minister Jenny Macklin, was established at the insistence of independent ACT senator David Pocock as part of winning his backing for Labor’s workplace reforms, which passed parliament in December. The advisory committee made 37 recommendations, including boosting JobSeeker by around 40 per cent, taking it from $693.10 to $957.60 a fortnight. It’s clear the government won’t be agreeing to all the recommendations. “I think people understand that we can’t do everything at once,” Jim Chalmers said. A newly established Economic Inclusion Advisory Committee produced a 97-page report that found it was hard to get by on welfare payments. Chalmers said it wouldn’t be possible to adopt all the recommendations.  James Carmody “We can’t do everything that we would like to do. There are more good ideas than is the capacity to fund them.” Cue some ideas from ACOSS. “Let’s remember that if we were to deliver on increasing the JobSeeker payment, for example to 90 per cent of the pension rate, we estimate that would cost in the order of about $5.5 billion,” CEO Cassandra Goldie said. “That’s less than a third of the cost of those stage three tax cuts, which overwhelmingly would be going to people on the highest incomes, and we could absolutely fund the desperately needed increase to JobSeeker and Youth Allowance if we rolled back even just part of those stage 3 tax cuts. “And if we rolled all [the stage 3 tax cuts] back we could probably also fund the commonwealth rent assistance and some investment in social housing as well.” In the meantime, the cost of food, gas, electricity, rents, and electricity is rising, but the growth in our take-home pay remains sluggish. Millions of Australians want solutions to the household squeeze they’re feeling every day, and they’re entitled to that. The only thing worse than not being provided with a solution at all is being presented with one that fails to ease your concerns. Loading…