Review task force to explore Reserve Bank response
The Reserve Bank’s ability to respond to supply side shocks such as the supply chain issues caused by the COVID-19 pandemic will be probed in an independent review.
Photo: AAP/Dan Himbrechts
The first independent review into the central bank since the 90s was announced by Treasurer Jim Chalmers in July.
In an issues paper, the review task force noted that central banks were well equipped to handle economic problems caused by demand fluctuations but disruptions on the supply side were more challenging.
“Changes to the supply capacity of the economy can push inflation higher but employment lower,” the review said.
“In that case, a central bank faces a trade-off between meeting its inflation and full employment objectives.”
The reviewers pointed to ongoing pandemic impacts, climate change and geopolitical tensions as potential threats to supply chains on the horizon.
The paper also said the central bank had trouble responding to economic downturns when interest rates are kept low.
“That is because, with interest rates lower on average, there is less room for the RBA to reduce its policy interest rate before reaching the effective lower bound – when it is as low as it can practically go,” it said.
The bank’s objectives – to keep the currency stable, maintain full employment and boost economic prosperity – will also be up for discussion, as will its strategies to meet these goals.
Currently, the RBA aims to keep inflation between two and three per cent to create the conditions for long-term economic growth and employment.
The bank’s past performance will also come under scrutiny.
The RBA has attracted criticism for suggesting that interest rates would not start rising until 2024, although governor Philip Lowe has since clarified that this forecast was “highly conditional”.
Noting that clear communication helps “build and maintain public trust”, the review will also look into how well the central bank communicates its decisions and reasoning.
The review will also examine the institution’s governance structure, as well as the culture of its workplace.
The only areas outside of scope are the RBA’s payments, financial infrastructure, banking, and banknotes functions.
The RBA governor will also face a parliamentary committee on Friday, which will grill Dr Lowe about existing interest rate policy and efforts to counter inflation.
-AAP
