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Sometimes you need an outsider to make a point that should be bleedingly obvious to a local.
The Organisation for Economic Co-operation and Development, the Paris-based think tank for rich countries, has used its latest survey of the Australian economy to do just that in relation to the Reserve Bank.
A plaque in the RBA’s headquarters in Sydney sets out its key functions. The OECD says it’s time to review the bank.
By recommending a far-reaching review of monetary policy, the OECD is telling the federal government and this country’s economic policy hardheads it’s time for a bit of self-reflection.
While the treasurer and government of the day like to claim credit for the nation’s economic outcomes, much of the weight is actually borne by the RBA, its board and its governor.
By setting the official cash rate, the RBA plays a pivotal role in the life of almost every Australian. From the monthly mortgage bill to the chance of getting a job, to the cash we pay for a cup of coffee, the Reserve is ever-present.
At its heart is the bank’s charter, which requires the RBA to maintain the stability of the currency and deliver full employment to ensure the economic prosperity and welfare of all Australians. It does this primarily by trying to keep inflation between 2 and 3 per cent.
But that’s a target it has failed to meet for the past five years. The cost of that failure can be measured in an unemployment rate higher than it needed to be, lower wages for workers and poorer outcomes for businesses.
On the RBA’s watch, wages growth slowed to record lows (even before the coronavirus pandemic), household debt has increased to record levels, productivity has fallen to a 60-year low and house prices have soared.
Not all of this is the bank’s fault. Most of it can be sheeted home to the nation’s elected officials as well as global trends that economists are struggling to understand. But as a key part of the nation’s economic policy family, the RBA has to take some responsibility.
Around the world, central banks have responded to their failings via independent reviews. Earlier this year, the NZ Reserve Bank was directed to consider house prices when setting monetary policy there.
It’s 40 years since the RBA was part of any formal review. We had $1 and $2 notes in our wallets, the government set the maximum interest rate on our mortgages and the go-to credit card for all Australians was Bankcard.
The world has dramatically changed since then. The central bank needs to catch up.
The OECD’s key argument is that given how much change has occurred because of the pandemic, now is the best time to make sure the RBA is working properly.
It has to be more than just a kick-of-the-tyres type review. The OECD wants to strip the entire jalopy down to its parts.
“Such a review should be broad in scope, potentially including a review of the central bank mandate, policy tools, methods of public communication, hiring processes and internal structures,” it said.
In other words, the bank’s charter, how it meets that charter, how it talks to the public, who it employs and how the whole bank operates. The OECD also says the review should be transparent and the entire process should occur on a “recurring basis”.
Prime Minister Scott Morrison has often argued his government’s approach to COVID-related policies is not “set and forget”.
The same should apply to the nation’s most important economic institution.
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