Nervous central bankers are watching Australia closely

The writer is the founding editor of the Intel Central Bank

There should be a few nervous central bankers keeping an eye on the wide-ranging review launched at the RBA.

All over the world, central banks have been affected by the rise in global inflation, which has left interest rates very low for a very long time. But the RBA was more blunt than others in admitting its mistakes, with its governor saying his forecasts were “embarrassing”.

“We should expect this better. Philip Lowe, governor of the Reserve Bank of Australia, said in May. However, the RBA was not alone in its miscalculation with central banks from Washington to Frankfurt believing that the rise in inflation would be more temporary. than it was.

This makes the RBA review an interesting test case for accountability. Did the central bank make the wrong call, or was something more systematic that veered?

There are two noteworthy elements in the RBA inquiry. The first, it will be implemented by an independent external committee appointed by the Treasury – two Australian economists as well as a former Deputy Governor of the Bank of Canada who is a current external member of the Bank of England’s monetary policy committee.

Central banks love their independence and are used to being in control. So it can’t be comforting for the RBA’s future to be influenced by outsiders’ recommendations.

Second, it is unusually broad with a sense of “scrutiny” or “evaluation” about it. Reviews in recent years of major central banks have been more focused on a particular aspect of monetary policy strategy, central bank law, or governance related to special instruments or functions.

This paper will examine just about everything in the RBA – the continued fit of the inflation targeting framework, the interaction of monetary policy with fiscal and macroprudential policy, and governance arrangements. It will also consider the selection of tools, policy implementation, communication, and “how to manage trade-offs between different goals”. Even its culture, management and recruitment processes will be evaluated.

Proof of how severe this has made other central banks is the reaction of the RBA’s counterpart in New Zealand. Less than a week after the announcement of the RBA review, a research paper co-authored by former Reserve Bank of New Zealand Governor Graeme Wheeler blamed central bank policy errors for rising inflation.

Soon after, incumbent Governor Adrian Orr issued a statement acknowledging that the Fed’s monetary policy had contributed to rising inflation. He went further and announced a review of the monetary policy performance of the Reserve Bank of New Zealand, including the use of additional policy tools. This review comes in addition to the recently launched five-year review of its monetary policy.

The RBA is likely to lead the central bank’s package in admitting its mistakes. But central banks globally are facing criticism for keeping monetary policy loose for longer, misjudging not only the onset but also its continuation of inflation, issuing too explicit monetary policy guidance and thus failing to adhere to it.

Under its forward guidance, the RBA has indicated that it will keep interest rates as low as possible until 2024. This low rate environment has not only failed to address rising inflation but has also helped exacerbate Australia’s housing boom – a significant systemic risk .

Already, forward guidance is being dropped all over the world. Last month, Federal Reserve Chairman Jay Powell dropped a policy of providing a detailed comment on what his central bank would do next about interest rates. “It’s time to go into a one-on-one meeting and not provide the kind of clear guidance that we’ve given,” Powell said at a news conference after the Fed.

Similarly, the European Central Bank abandoned its future policy guidance last month. “We are more flexible; from now on we will make our monetary policy decisions on the basis of the data,” said Christine Lagarde, president of the European Central Bank. [we] You will work month after month and step by step.”

Earlier this week, the RBA joined the trend in noting that it would no longer provide explicit guidance forward: “The board expects to take further steps in the process of normalizing monetary conditions over the coming months, but it is not on the predetermined path. “

If inflation does not subside and interest rates rise significantly, it will not be just future guiding policies under review. More central banks around the world will face official scrutiny. Australia’s review is unlikely to be the last.

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