RBA review could look at ways to avert the next crisis

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April 7, 2021 — 4.00pm April 7, 2021 — 4.00pmNormal text sizeLarger text sizeVery large text size

As Australia plots its economic recovery from the pandemic, public attention is understandably focused on politicians but this week the Herald has felt it equally important to put the spotlight on the policies of the Reserve Bank of Australia.

As we reported on Tuesday, shadow treasurer Jim Chalmers has joined a growing group of influential economists who have called for a review into the bank’s operations in the light of its failure to meet its primary function of keeping inflation between 2 per cent and 3 per cent a year.

The target range is written into an agreement between the RBA and the federal Treasurer but the current governor, Philip Lowe, has not delivered on this KPI.

Consumer price inflation fell below 2 per cent in 2014 and has only climbed back into the target range on a couple of occasions since.

While low inflation has some advantages for those living on savings, when inflation is too close to zero workers cannot ask for pay rises and the economy cannot grow. Critics say the RBA should have cut interest rates much sooner to boost growth. If it had done so, unemployment would have been lower heading into the pandemic.

The RBA basically admits it kept rates high too long and has tried to explain where it went wrong. It was too worried about the risk that low interest rates would start a house price bubble and it failed to spot changes in the labour market and the global economy, which reduced workers’ ability to push for inflationary wage rises.

Some have even called on the RBA board to quit over this bungle but that would be an overreaction. First, the RBA is in the same boat as most other central banks of the Western world which have struggled to raise inflation for similar reasons. Second, despite the miscalculation, the Australian economy continued to grow, albeit slowly.

Whatever the criticism of the RBA’s actions before the pandemic, the central bank has changed its policies dramatically since then. It is now determined to