Overall, the Reserve Bank of Australia (RBA) reform recommendations suggest no substantive change in the direction of monetary policy, interest rates, medium- to long-term inflation, or the underlying strength of the labor market. doing.
Over the next 10 to 20 years, interest rates will fluctuate on unexpected timelines, inflation will hover around 2.5%, and labor market outcomes in terms of unemployment and wage growth will be influenced by business cycles, immigration, , and determined by economic fluctuations. Long-term structural issues beyond RBA’s control.
This is about the same as the last 30 years, the success of achieving these goals determined by the judgment of personalities pulling policy triggers against the rise and fall of interest rates.
These days, those personalities are failing. This is not a system malfunction.
If the RBA’s current projections are correct, over the decade to 2025, annual inflation will stay within the 2-3% target for just two quarters. This is a dismal record.
Other changes recommended for the RBA – related to openness, transparency in the decision-making process, and the pool of policy experts to implement the setting of monetary policy – are all worthwhile changes underway. But they are not the final game.
Overall, reform is necessary and long overdue. If they were fully implemented, the RBA would likely make better decisions on monetary policy, hit its inflation target more frequently, and have less volatile inflation outcomes.
The population will be better informed about the state of the economy. This is good.
Ultimately, monetary policy will still be calibrated for the express purpose of hitting the 2-3% inflation target.
That said, the new RBA’s Monetary Policy Committee will be as good as the people it elected.
If the so-called experts on the board have the wrong expertise, poor judgment, and go to work with a pre-determined view of economic policy setting, this is a big risk, and reform is futile. will be
There’s another issue with reviews, and it can be a thorny issue when you think about it.
A rise in the labor market, especially unemployment, and its impact on the RBA’s monetary policy deliberations could pose a problem.
Importantly, monetary policy cannot target unemployment in a long-term, structural way. Sure, it affects the cyclical ups and downs of the unemployment rate, but you can’t set interest rates to achieve full employment.
If the new board thinks this and policies are set “easily” to stop unemployment from rising when inflation is too high, there will be an inflation problem that is far more damaging to the cost of living. It’s a problem for all Australians and will eventually lead to higher unemployment.
At this point, recent rate hikes are clearly designed to slow economic growth, increase unemployment to remove upward pressure on wage growth, and eventually return inflation to target.
That was when inflation hit 7.8%.
As things stand, the RBA and market economists expect the unemployment rate to rise in the medium term. Given that inflation is still too high for now, it would be a policy mistake for the RBA to cut interest rates now based on these projections.
A misguided board that emphasizes the RBA’s unemployment target could make that mistake.
One of the review’s excellent decisions is to keep the Treasury Secretary on the Board. It’s not formally clarified what their specific roles will be, but the review notes that the link between fiscal and monetary policy will help control inflation and maintain full employment. would like to be more involved. That said, Treasury secretaries can provide detailed updates from each meeting on the path of government demand in the economy and frame their outlook for public demand over the forecast period.
For example, if government finances show a slowdown in spending, this will be reflected in discussions about the economic outlook and, if necessary, changes in monetary policy. Given the role of government spending and tax decisions in the economic cycle, this is useful information.
Overall, the RBA’s recommended reforms are good news and will make central banks more accountable for their decisions. As a result, you are more likely to make those decisions correctly.
However, its success will depend crucially on the personalities of the people appointed to the board of directors.
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