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The Reserve Bank doesn't know what it's doing

National correspondent for The Saturday Paper Mike Seccombe on why the Reserve Bank is so secretive, and the push to change it.
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Yesterday afternoon, the Reserve Bank of Australia lifted rates for the third time in three months – raising the cash rate by a full 50 basis points to 1.35%.

The rise will lift interest rates to their highest levels in years and put more pressure on household budgets, but it’s something the RBA says is necessary to bring down inflation.

However, the RBA’s decision comes just as questions are being asked about how the institution is working, and whether it’s acted too slowly in the past.

Today, national correspondent for The Saturday Paper Mike Seccombe on why the Reserve Bank is so secretive, and the push to change it.

Socials: Stay in touch with us on Twitter and Instagram.

Guest: National correspondent for The Saturday Paper Mike Seccombe.

Read Transcript

[Theme Music Starts]

##RUBY:
From Schwartz Media I’m Ruby Jones, this is *7am*. 

Yesterday afternoon, the Reserve Bank of Australia lifted rates for the third time in three months – raising the cash rate by a full 50 basis points.

The rise will lift interest rates to their highest levels in years and put more pressure on household budgets – but it’s something the RBA says is necessary to bring down inflation.

The RBA’s decision though comes just as questions are being asked about how the institution is working, and whether it’s acted too slowly in the past.

Today, National Correspondent for *The Saturday Paper* Mike Seccombe, on why the Reserve Bank is so secretive and the push to change it.

It’s Wednesday July 6.

[Theme Music Ends] 

##RUBY:
So Mike, yesterday the Reserve Bank raised rates for the third time this year and it's especially noticeable because we haven't really seen these kinds of rapid rate rises for a long time. This is a reversal of the last decade or so at the Reserve Bank. So it's a big shift, isn't it?

##MIKE:
It sure is. We haven't seen an increase of rates like this for a long time and furthermore, it looks like it could continue every month between now and Christmas.

##Archival tape -- Reporter 1:
“The Reserve Bank today lifted the official Interest rate for the first time In 11 and a half years.” 

##Archival tape -- Reporter 2:
“This is the third month of rises, so it will make a difference…”

##Archival tape -- Reporter 3:
“This is now the most aggressive interest rate hikes we’ve seen since the early 1990s.” 

##MIKE:
Even so, I mean, rates are still historically low. But to raise them sort of month on month like this in quite large increments is very rare. It's the first time it's happened in decades. And of course, it comes after the governor of the Reserve Bank, Philip Lowe, told us last year that rates would probably stay at their historic lows until 2024, at least.

##Archival tape -- Leigh Sales:
“Governor, welcome to the program.”

##Archival tape -- Philip Lowe:
“Thanks Leigh, it’s great to be with you.”

##Archival tape -- Leigh Sales:
“These are your first public remarks since the 50 basis point rise, I wanted to immediately ask therefore… why did the Reserve Bank go so hard? It was a bit unexpected.” 

##Archival tape -- Philip Lowe:
“Well I think Leigh, Australians need to be prepared for higher interest rates.” 

##MIKE:
And then around the beginning of this year he said that would rise. But incrementally and gradually.

##Archival tape -- Leigh Sales:
“After the RBA October board meeting last year. You said that rates would not rise before 2024. What changed from last October?”

##Archival tape -- Philip Lowe:
“What we've said right through the last two years was and this is important, if the economy evolved as we expected, interest rates were unlikely to increase until 2024.”

##MIKE:
And now he believes they will need to rise quite quickly and the cash rate could be at 2.5% by the end of the year, which is a long way up from where it was, you know, 0.1. 

##Archival tape -- Philip Lowe:
“I'm confident that inflation will come down over time, but we'll have to have higher interest rates to get that outcome. And how much higher remains to be determined.”

##MIKE:
It's an interesting time for the Reserve Bank, I guess you could say it's under quite a lot of scrutiny and the suggestion widely about the economics community is that the decisions it's made have not been as good as they might have been. You know, there's quite a lot of open speculation about whether it's actually fulfilling its task, which is really to keep inflation running within a fairly constant band of 2 to 3% and to keep employment as close to full as possible.

##RUBY:
Okay. And so could you tell me Mike a little bit more about the way that the Reserve Bank actually works? Who is it that is making these decisions about whether interest rates are going to rise or to fall at any given time?

##MIKE:
Well, theoretically it's the board of the Reserve Bank that makes these decisions and the board is made up of nine members. And so who these nine people are.

Three are bureaucrats. Right. That's the Governor, the Deputy Governor and the head of the Treasury Department. There's usually one academic economist, someone who actually knows something about how monetary policy is set. But the other five, the majority of the RBA board appointments are senior business people usually, and many of these appointees have no relevant formal qualifications at all, as economists. They tend to represent big sectional interests. So, you know, you get the likes of Solomon Lew from the retail sector, you know, from construction billionaires, both Catherine Tanna from the resources sector, Donald McGauchie from primary industry. And that's pretty unusual around the world. Most central banks like the US Fed, like the ECB, the board are overwhelmingly trained economists with a deep knowledge of monetary policy. 

One former RBA member, Warwick McKibbin, who served on the board for a decade, who is a qualified economist and a monetary policy expert, as he put it to me. This board is composed of business leaders and they're very bright people, but they don't have the training for the job.

And when he says the training, he means they don't necessarily look at the research on the economy and they're not able to ask the questions that need to be asked about whether there are mixed messages about the economy and how to make the right decisions based on that.

Another very good economist I spoke to, Saul Eslake, told me and he conceded he was caricaturing them a bit. But he said.

##Archival tape -- Sail Eslake:
“Australia's Reserve Bank board is unusual in that it's almost as if you know something about monetary policy, you were disqualified from membership.”

##MIKE:
So, you know, pretty stinging criticism there for the current composition of the RBA board.

##RUBY:
And so what do we know then, Mike, about how these people who aren't necessarily monetary experts or even economists are actually making the decisions they do? What's the process?

##MIKE:
Well, that's the problem. We don't really know anything about how they make their decisions. It's super secretive. They do publish some reasoning, but it's far less detailed than what we see come out of other central banks. So there isn't a lot of public scrutiny. They don't vote as such. They have a sort of consensus model whereby everyone has to be more or less on board. As Saul Eslake put it to me.

##Archival tape -- Saul Eslake:
“Our central bank isn't nearly as transparent as most others. For example, the minutes of our board meetings do not record how people vote.”

##MIKE:
Yet they do in most other central banks. Board members are actively discouraged from talking about monetary policy, whereas in most other economies, board members go ahead and give speeches about it all the time, presumably because they're experts, whereas ours aren't. And it's also arguably very insular in its employment culture.

##Archival tape -- Saul Eslake:
“It's very, very rare that outsiders are appointed to senior positions in the Reserve Bank. They grow their own to a much greater extent than their counterparts in other parts of the world.”

##MIKE:
So we don't really see very much of the decision making process. Ironically enough, about the only real insight we've ever had into the decision making process of the RBA came about because the US government sent a confidential cable about it back in 2009, which described tension between the RBA and the government at the time, and that was then leaked to WikiLeaks. So that's one of the only documents we have that gives us any kind of a peek into the decision making process at all.

##RUBY:
Right. And so what did the cable say, Mark, and what does it tell us about the RBA's decision making process?

##MIKE:
Well, this particular cable showed that the government of the time, that is the Rudd government and the time was the height of concerns about a global recession caused by the GFC. The Rudd Government was very, very annoyed with the bank. It wanted the bank to more aggressively cut interest rates to try and stave off what they saw as a likely coming recession. So things were very tense and all of that is explored in great detail, you know, with quotes from various players in this cable, which was made public only because of WikiLeaks and which was completely unknown in Australia at the time by anyone outside that room.

##RUBY:
Hmm. And I suppose the big question with that then, Mike, is given the secrecy that the RBA seems to operate under, and I suppose the questions about the make up of its board is the Reserve Bank, despite those issues functioning in the way that it should, is is it keeping inflation manageable and is it keeping unemployment low or could it be doing those things better?

##MIKE:
Well, you're right. That's the big question. And the consensus amongst many economists is that it hasn't.

And so the future operation of the bank is going to be considered for the first time in several decades. There will be a review of how the RBA functions. And that could mean some changes to the way it operates for the first time in a long time, if not forever.

##RUBY:
We'll be back in a moment. 

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##RUBY:
Mike, can you tell me a bit more about this review into the way the Reserve Bank operates? What's it going to look at?

##MIKE:
Well, it's been a long time since the Reserve Bank was reviewed. Originally it was supposed to be reviewed every five years, but clearly that hasn't happened. It hasn't been for several decades. Most comparable nations have done reviews in recent years and in many cases they've brought in overseas experts to ensure that it's done independently. And that's what many, many policy experts in this country want to see happen. And as to how it's handled its job well, one of the only real studies that's been done into the RBA’s effectiveness was done by Labor's Andrew Leigh and Dr. Isaac Gross, both very good economists, and they used the Reserve Bank's own model and they found that between 2016 and 2019, while the current governor, Philip Lowe, was at the helm, the bank quote dramatically underperformed because it held rates too high. And the study found that economic growth as a result was not as strong as it should have been. Wage growth was quote anaemic and inflation was consistently below the RBA's own target. Now as to the actual review that's been on the cards for a while, the previous government talked about it. Labor has said they will do one. The ultimate decision about the form and scope of the enquiry will be made by Treasurer Jim Chalmers and it's expected to start sometime in the next month or thereabouts. To date, Chalmers has been ambiguous in his answers on the question of how the review will go, you know, saying that he has quote a mountain of respect for Phil Lowe but he's leaving open the possibility of changes to the size and composition of the board, which I think is interesting.

##RUBY:
Right. So it sounds like there is the possibility of changes being made to the board. Do we know any more about what's actually on the table? Could there be a whole new board for the Reserve Bank?

##MIKE:
Well, certainly that's what some people would like. They certainly believe the review should be quite wide ranging. A large number of high profile economists, including Warwick McKibbin and Saul Eslake, have signed a letter a few weeks ago to the Government calling for a root and branch reform. So I've got to say, all these observers wonder about the extent to which the structure of the bank and its board have made it prone to error. I've mentioned a couple of the signatories that I spoke to. I spoke to another one, Peter Tulip, who's also a former senior economist with the RBA and also worked for the Fed in the US, pretty cluey bloke and he would like to see the current composition of the board junked entirely. Just get rid of the lot of them. As he put it to me.

##Archival tape -- Peter Tulip:
“Other central banks around the world have a monetary policy decided by experts.”

##MIKE:
And as he said, you know, if you look at the composition of the Fed in the US or the Bank of England or the European Central Bank.

##Archival tape -- Peter Tulip:
“They're not just professional economists.”

##MIKE:
They're stars of the profession, as he put it.

##Archival tape -- Peter Tulip:
“The people that wrote the textbooks that I learnt monetary policy from, run the Federal Reserve.”

##MIKE:
He would see the whole thing scrapped, get rid of these laypersons and would have experts.

##Archival tape -- Peter Tulip:
“You know, so whereas other countries have stars making their monetary policy decisions, we have part time amateurs.”

##MIKE:
That's probably the most extreme position. But the broad consensus amongst experts seem to be that we certainly need to balance it up with more expert advice, more independent people on the board willing and able to challenge the governor that they can say, well, but why are you saying this, Phil? X piece of evidence says something else. 

##RUBY:
Hmm. It sounds really like there is an opportunity here, Mike, because you have this institution, the Reserve Bank, that has a lot of influence over everyone's day to day life on how likely our wages are to rise or what our mortgage repayments might be. And there is this momentum I suppose, or this question over whether or not it could do its job better to be more transparent and to have a wider range of people inform its policy. And in some ways that seems like yeah, like a big opportunity.

##MIKE:
I think it is, it's an opportunity to go back and assess what the mission of the Reserve Bank should be and how it can do the most good. The Reserve Bank Act. Back in 1959, instructs the bank's board to conduct monetary policy, quote to the greatest advantage of the people of Australia. And specifically it says that they should pursue the maintenance of full employment. In fact, the act makes no specific mention of inflation, but that seems to have become the bank's chief concern in recent years policing inflation and raising rates when necessary and lowering them when necessary to keep inflation within the 2 to 3% target. So the suggestion is they have not been very good over time about controlling inflation and maximising employment, which is interesting. 

But I think the bigger issue here is just the fact that the RBA is something of a black box, you know. Board members are actively discouraged from speaking publicly. We don't have a vote among members. We don't have detailed reasons published. The picture that McKibben, who once again was in the room for a decade. The picture McKibben paints and the pictures that Peter Tulip and others paint is of a board without the expertise to dissent. They can't argue the toss because they don't know enough, and so they rubber stamp what the governor brings them.  And, you know, frankly, do we really think it's good enough that the only insight we have ever had into the way the board operates came to us from a U.S. government cable made public by Julian Assange? I don't think so.

##RUBY:
Mike, thank you so much for your time.

##MIKE:
Thank you. 

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[Theme Music Starts]

##RUBY:
Also in the news today,
More than 150 flood evacuation orders and warnings affecting 50,000 people are in place across New South Wales as heavy rain and strong winds continue across the state. 

New South Wales Premier Dominic Perottet has warned the current crisis is “far from over” with major flooding likely to continue for the next few days. 

And ATAGI - Australia’s independent expert advisory group on vaccines is meeting to discuss fourth Covid-19 booster doses, as Omicron subvariants drive a rise in infections, leading some premiers to urge people to wear masks more widely. Hospitalisations caused by the latest wave of Omicron are expected to peak in late July. 

I’m Ruby Jones, this is *7am*. See you tomorrow.
[Theme Music Ends]

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