Everyone loves the RBA's Independence
Or at least here is why they should
The creation of independent central banks is one of the best policy innovations of the 1990s. This is because it represents a win-win-win approach to monetary policy, getting better outcomes for all involved.
Good for central bankers
Obviously central bankers' lives are made significantly easier by giving them operational independence. They don't have to worry about the day-to-day politics when setting monetary policy, which lets be honest is not their forte, and instead focus on the economics of monetary policy. They can't quite ignore politics entirely (as the past 12 months have shown) but it does greatly diminish the degree to which politics intrudes of central banking.
Better for governments
Somewhat less obviously, central bank independence is also great for Treasurers and the governments they are a part of. Jim Chalmers has played a reliably straight bat whenever anybody asks him to comment on the latest interest rate hike. “The independent RBA sets monetary policy and I respect their independence” is a near universal refrain.
This independence allows the government to avoid the direct political blowback from rising interest rates, while at the same time allowing them to benefit from the lower rate of inflation and falling interest rates that todays hikes will generate over the next two years - just when the government is up for re-election.
The independence of the Reserve Bank gives cover to the Treasurer to wash his hands of all the nasty aspects of tightening monetary policy, while being able to claim credit for the broader gains that come from achieving the RBA's dual mandate in the medium term.
In fact the one sliver of direct control the government has over the RBA's choice of interest rates is actually extremely politically inconvenient for the Treasurer. While on paper he has the ability to override the RBA and force them to keep interest rates on hold or even cut them this option is really a policy mirage. President Erdogan did something very similar back in 2021 when inflation started to rise in Turkey. Instead of allowing interest rates to rise he overrode the Central Bank of the Republic of Türkiye and forced them to cut interest rates in order to lower the cost of living. This instantly evaporated the central bank's credibility and led to a massive wave of capital flight, leading to the Turkish lira crashing by more than 30%.
I'm not sure we would see exactly that reaction should an Australian Treasurer make a similar choice but we may very well come close.
A 30% fall in the Australian dollar would instantly increase the price of all imported goods by a third, including household staples such as:
Cars
Petrol
Drugs
Flat-screen TVs
Smartphones and laptops.
And it would be all directly attributable to a specific government action. Households angry that they cannot afford the new iPhone would know who to blame.
So while in theory the Treasurer could overrule the RBA, it would create such an immediate backlash from international capital and FX markets that it would be an absolute non-starter unless the RBA went truly crazy.
The Treasurer knows this of course which is why he sensibly does not pursue this option. It does, however, create a political headache for him when less serious people like Greens Senator Max Chandler-Mather try to make political hay by calling out for an intervention without ever acknowledging the incredibly high cost it would come with.
Best for the Australian people
Finally the Australian people should love the RBA's independence most of all as they are the principal beneficiaries of the RBA's strong credibility when it comes to setting monetary policy. Despite the high rate of inflation, inflation expectations remain well anchored, this is the result of the RBA’s long history of independent and (mostly) well calibrated monetary policy.
The RBA’s credible inflation target underpinned the almost three decades of uninterrupted economic growth that Australia experienced prior to the pandemic. That is a big reason why the RBA review recently recommended solidifying the RBA's independence by removing what few vestiges of control remain in the Treasurer’s purview.
Where the buck should stop
That being said, for all its vaunted benefits, I don't believe the Reserve Bank should be fully independent akin to a monetary High Court.
Indeed the Reserve Bank of Australia can never be truly independent. Ultimately the Reserve Bank will always be dependant on the sovereign Parliament of Australia who will always have the ability to regulate monetary policy even if it means re-writing the Reserve Bank Act to do so.
The real question is who has the power to over ride it?
What the RBA review is really suggesting here is a shift of power away from the Government and towards the Parliament. The Treasurer may not be able to override the the RBA under these reforms, but the Parliament will always be able to do so.
So in the unlikely event that the Reserve Bank of Australia makes a truly gargantuan policy error (or in Phil Lowe’s words “goes crazy”) which demands some level of intervention, who do we want having the power to override them? In my opinion that power is best held by the executive government.
Overruling the RBA would be an incredibly complicated policy decision that would involve weighing up all sorts of risks and benefits. It's a truly break-glass emergency that could permanently scar our ability to implement a consistent and credible monetary policy regime. On the other hand a “crazy” RBA could also be very damaging.
Thus the decision to override the Bank must be made with the full expertise and backing of the only economic game in town outside of Martin Place with the chops to analyse the decision - the Commonwealth Treasury. That's why this call should ultimately stay with the Treasurer. As much as the Australian Parliament has a greater call on democratic accountability, it is not the fastest decision-making body in the country and in the case of an economic emergency a future government may need to intervene on a quicker timetable than Parliament can rewrite the Act.
To be clear I find the circumstances that would involve such an intervention almost unimaginable - certainly far from where we are today. But to the extent one can imagine them, I think it's better that that decision rests with a government who has access to the expertise and the ability to make quick decisions in particular the Treasurer of Australia.
So as much as we all benefit from the Reserve Bank of Australia's independence it would not be the worst thing in the world if the override escape hatch is left in the hands of the Government. Even if it means the Treasurer will have to bat away the crazies who demand it gets used every time the RBA does something that frustrates the median voter.