Recent events, which have seen households squeezed between soaring petrol prices and ever-increasing interest rates, highlight the need for a serious rethink about the way the Reserve Bank of Australia is led, the composition of its board, and who is accountable when it gets policy wrong.
Interest rates have risen 1.25 percentage points since May; a jump that has added $520 a month to a $500,000 mortgage. That could double by the end of the year if the RBA continues on its current trajectory.
Given by the end of September fuel prices will likely be twice what they were 12 months ago, that will be unsustainable for many households, particularly those who have borrowed to the hilt to get into the property market in the past two years.
The reason so many people have been caught off guard is that, by its own admission, the RBA board pursued an unconventional Australian Government bond yield target, stuck with it for too long and, despite red flags, allowed its governor, Philip Lowe, to continue reassuring punters interest rates were not going to rise until late 2023 at the earliest or in 2024.
As late as last September Dr Lowe was reassuring borrowers and potential borrowers the cheap money would continue well into 2024: "I find it difficult to understand why rate rises are being priced in next year or early 2023," he said. "While policy rates might be increased in other countries over this time frame, our wage and inflation experience is quite different".
A fortnight later New Zealand, whose economic recovery had been following a similar path to Australia's, began tightening its fiscal policy with the first in a series of substantial rate increases.
The RBA held off on announcing its first rate rise of 0.25 percentage points until May, just before the federal election. This was followed in quick succession by two 0.5 percentage point jumps in June and July which have taken the cash rate from a historic low of 0.1 per cent to 1.35 per cent.
In its own review of its yield target the RBA has acknowledged its approach could have been improved and that the exit from the policy was "disorderly", and the bank suffered "reputational damage" as a result. That's because for millions of borrowers, whether for homes, business, industrial development, or investment, the end of cheap money came as a bolt from the blue.
Some of these borrowers made the mistake of believing the governor of the Reserve Bank, the person ultimately responsible for the country's monetary policy, and made life-changing decisions based on his words. They are entitled to feel they have been misled.
While there has been a mea culpa from Dr Lowe, and admissions by the RBA that it was more focused on downside risk than on what could happen if the economy rebounded faster than its pessimistic prognostications were indicating, much damage has been done to the credibility of the RBA itself.
Given the gravity of what has occurred the Chalmers review of the RBA needs to be brought forward to this year. Serious consideration also needs to be given to broadening the composition of the RBA board, which is heavily weighted in favour of the practitioners of the "dismal science". The possibility of bringing in a future governor from outside in order to obtain fresh perspectives should also be investigated.
As for Dr Lowe, he must know if the CEO of a public company had presided over blunders of those proportions shareholders would be calling for their resignation.
It could be timely for him to consider whether the quickest way to mend the reputational damage the RBA has inflicted upon itself would be for him to step down.
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