17 May 2021
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Will Gillard/Swan politicise the RBA and undermine its credibility?

Christopher Joye
17 January 2011

The problem with not reappointing current RBA Board member Professor Warwick McKibbin, who is the nation's most respected macro-economist (and a noted inflation hawk), because of his outspoken remarks on economic policy, and replacing him with an appointee who is viewed as more sympathetic to the government's prescriptions (such as Ross Garnaut), is that Gillard and Swan will be politicising Australia's otherwise independent central bank. And there is nothing more damaging to a central bank than undermining its credibility in the eyes of financial markets.

There can be little doubt that the markets would view Ross Garnaut as less hawkish on inflation than McKibbin. Crucially, the RBA's political independence is a recently won thing, as I discussed in a post not so long ago. For example, it was only in mid-1994 that Australia's Prime Minister at the time, Paul Keating, was directly interfering in the RBA's purportedly independent monetary policy decisions, and compelling the Bank to adopt a less aggressive stance on rates (this is why, contrary to some claims, the Statement that first formally documented the RBA's independence, and which was signed by Treasurer Peter Costello and the RBA Governor in 1996, was such an important policy outcome). Here is what I wrote last year:

“Paul Kelly's latest book, The March of Patriots, unearths a revealing fact about the RBA's autonomy. The conventional wisdom is that by the early 1990s the RBA was effectively impervious to political influence following the darker days when Treasurer Paul Keating declared that he would not, “abrogate responsibility for the stance of monetary policy from the elected government to unelected and unrepresentative public officials in the name of fighting inflation first”.

Kelly relays that the Governor at the time, Bernie Fraser, recalled:

“I was very disappointed when I heard about [these comments]. It caused enormous problems...It made life much more difficult and made it harder to establish the Bank's credibility. Paul said he would correct it publicly when he got the opportunity but it never really was withdrawn.”

What is arguably more interesting is that Kelly documents an explicit example of direct political interference in the Australian monetary policy setting process as late as mid-1994. The RBA was preparing itself to aggressively raise rates to crush the risk of an incipient inflation outbreak.

Yet before the first move Prime Minister Keating summoned the Governor of the Bank and the Treasury Secretary to his official residence. As Kelly tells it:

“Fraser's recommendation [notably to the PM] was for a full 1 percentage point increase. The meeting was on Keating's turf. 'The Prime Minister had concerns,' [Treasury Secretary] Ted Evans said in a masterly understatement...The Prime Minister wanted a concession. He argued that the increase was too much, too sharp. In the end, they knocked 0.25 per cent off Fraser's proposal...[Ian] Macfarlane said: 'I was told they brokered it down to three-quarters of the point'...Keating got a concession.”

What is evident from Kelly's analysis is that many of the gains the RBA made towards independence and its inflation-targeting framework, which, ironically, had been advocated most forcefully by the RBA's bete noir, Dr John Hewson, were in large part attributable to Bernie Fraser's unique working relationship with the strong-willed Treasurer-cum-Prime Minister.”

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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