Governor Lowe has been (unfairly in my opinion) lambasted for apologising for the 2024 interest rate guidance. Sure the off-the-cuff phrasing could have been better, but I doubt anyone will remember or care about it a week from now.
Much more problematic is the RBA’s recent tendency to get tangled up in partisan politics.
Potent and Pure
The basic compact of RBA independence requires that central bankers keep their focus on monetary policy and refrain from making politically contentious comments. In return politicians will leave the tactical decision-making to the experts at Martin Place. Central banks are thus given immense economic power, but are required to be politically “pure”.
This isn’t always as easy as it sounds, politics is hard. You can't just stand up and declare “I’m independent” and say job done. It’s often hard to know what might be considered a political comment and what will pass by without anyone caring.
What passes for a political intervention often depends on the context. The RBA, like most economists, has often publicly extolled the benefits of free trade. But because there is a bipartisan consensus on the issue nobody really cares. This would not be the case in many other countries (or other decades) in which support for free trade is a more divisive or salient issue.
Here be dragons
But sometimes it is easy to see where the more treacherous waters are. The foundational political divide in 20th century Australian politics was industrial relations. And it seems like the race to a zero emissions economy is going to define the political landscape in the 21st Century.
These should be obvious no-go areas for all but the most vanilla of comments.
Governor Lowe last week managed to sidle up to both issues in a single speech, calling for greater “flexibility” just as the Government tried to pass its multi-employer bargain reforms and suggesting that the government to do more to increase gas supplies.
The media have interpreted, unfairly or otherwise, the comments as criticism of government policy which I can’t imagine the Treasurer’s Office was thrilled to see. The RBA is rightly reluctant to answer a politician when they ask “Don’t you agree that my opponents' policies are terrible?”, but they still venture into non-monetary policy related areas that have little upside and considerable potential to draw (yet) more criticism.
The most egregious example of this was the Prime Minister's interview on Wednesday night with 7.30, the Governor's comments were cited as criticism of both the government’s flagship industrial relations reform and their energy policy. If I were the PM I might wonder why exactly this public servant was straying from their delegated policy area to comment on my democratically backed political agenda.
It is true that there are supply-side reforms that would make the central banks job of stabilising inflation easier. And I can understand why the Governor would advocate for others to lend a hand in getting inflation back to the 2 - 3 per cent band. If I were handed a microphone with a national audience I would also be tempted to talk about the importance of undergraduates doing the reading before class - it would certainly make my job easier!
Reverse Causality
But that gets the relationship between the RBA and Canberra backwards. It is not parliament’s job to ignore their democratically-endorsed policy agenda to make the RBA’s job easier. It is the RBA’s job to stabilise aggregate demand regardless of the policies pursued by the people’s representatives in parliament.
Whenever supply side issues come up they should say “We will focus on stabilising inflation and full employment per our mandate. We will keep doing that regardless of the industrial relations regime, or the climate change shocks that occur, as best we can”. Since the advent of inflation targeting we have seen monetary policy successfully stabilise aggregate demand in economies with and without natural resources, with all manner of labour market regulations and different fiscal policies.
Outside of some truly extreme circumstances the RBA has the tools to do the job, and should not get involved in political issues when it doesn’t need to.
The gift of policy independence is an incredibly powerful one. And as any number of Spiderman movies have taught us, with great power comes great responsibility. Central bank independence means giving up the ability to comment on any other issue outside of monetary policy - no matter how tempting it may be.