17 April 2024
1300 794 893

Who determines our interest rates is important

Peter Switzer
21 March 2024

If interest rates weren’t so important, this Labor/Coalition battle over who should be determining our interest rate future would simply be seen as a silly political stoush ahead of the 2025 election. Call me an economist but I think it’s more politically important than it is economically critical. But because the country’s home loan and business loan borrowers are under the pump praying for a rate cut, this new battle in Canberra needs to be analysed.

In a nutshell, shadow treasurer Angus Taylor reckons Jim Chalmers is set to stack the RBA’s rate determination board with ‘‘his mates’’. By this he means Labor people but I’m not sure what that will imply. I guess he’s suggesting they might be more inclined to cut too early to help battlers and that could be economically irresponsible.

In case you’ve forgotten, there was an independent review of the RBA that recommended that we have two effective boards: one that will do interest rate changes and the other to watch over the actions of the RBA from a governance angle.

The Treasurer accepted these changes, and the thinking was that we need real economic smarties on the rates decision team. And this makes a lot of sense, but Mr Taylor has a little problem on this front.

You see, as the SMH’s Shayne Wright has reminded us: “The Coalition appointed all members of the RBA board up to 2022, including when then-governor Philip Lowe, who said in March 2021 that interest rates were unlikely to increase until at least 2024.”

As Homer Simpson might say: “Doh!”

In reality, the current team on the board are all smart enough to stay on the board but there has always been a question, which no one will ever answer, and that’s this: Does the RBA Governor prevail over their board members, like a lot of chairs in public companies do, or is the Governor and the board a bunch of out-of-touch economic smarties who don’t know the real world?

Either way, the track record of the RBA has been good medium to long term but, as I’ve said before, it has often over-tightened and under-loosened in the past. In 2020, they over-loosened, promised to not tighten until 2024 and then broke that promise in 2022 with 13 rises by late 2023.

I’d like to say these board members are beyond reproach because I know some of them and I like them. They’re smart but they’ve been parties to silly big mistakes!

And that’s why I can’t jump on board with Taylor when he complains that the Chalmers appointments of Iain Ross (a former head of the Fair Work Commission and an employee of the ACTU) and Elana Rubin (chair of the Australian Business Growth Fund and a non-executive director at Telstra) are really a big risk to what the RBA decides on rates.

Wright reports that “the Liberals want all members of the bank board, which includes six people chosen by the treasurer, to shift to the rates committee”. However, this is an argument I find hard to support, given my memory of how badly most of these people have performed in recent years.

I really think the Coalition and Angus Taylor have bigger fish to fry before next year’s election.

 

Comments
Get the latest financial, business, and political expert commentary delivered to your inbox.

When you sign up, we will never give away or sell or barter or trade your email address.

And you can unsubscribe at any time!
Subscribe
1300 794 893
© 2006-2021 Switzer. All Rights Reserved. Australian Financial Services Licence Number 286531. 
shopping-cartphoneenvelopedollargraduation-cap linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram