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Top Economists see no prolonged high inflation, no rate hike next year (Q1)

Despite appearances – especially in the United States – the era of high inflation isn’t set for a comeback in the view of Australia’s leading economists, and most see no need for the Reserve Bank to lift interest rates next year.

In the US, figures released last week showed the consumer price index surged 6.2% in the year to October, the most since 1990. So-called “core” inflation (which excludes volatile prices) climbed 4.6%, also the most for 30 years.


US underlying inflation

US consumer price index for all urban consumers, all items less food and energy, city average. US Bureau of Labor Statistics, St Louis Fed

Former US treasury secretary Larry Summers is talking about a jump to 11% as over-heating becomes entrenched, necessitating rate hikes in the United States, Britain and Australia.

But the 55 leading Australian economists surveyed by the Economic Society of Australia and The Conversation this week aren’t buying it. They point out that Australia’s underlying inflation rate (while climbing) is much lower, at 2.1%.


US and Australian underlying inflation

Australian Bureau of Statistics, US Bureau of Labor Statistics

Whereas in the US wages climbed 4.6% in the year to September, in Australia they climbed 1.7% in the year to June, an official figure that will be updated with readings from the September quarter on Wednesday.

32 of the 55 top economists surveyed by the Economic Society of Australia rejected the proposition that the current combination of Australian fiscal and monetary policy posed “a serious risk of prolonged above-target inflation”.

Only 12 supported it. When weighted by the confidence of respondents expressed on a scale of 1-10, backing for the proposition shrank from 22% to 20%.



Independent economists Nicki Hutley and Saul Eslake said fiscal policy (government spending) was set to tighten as COVID spending programs expired, making projected high inflation unlikely.

Harry Bloch said the prices of Australian services were predominantly determined here, by Australian wage rates, which were held back by the bargaining strength of unions and government wage setting policies.

Big inflation would require wage inflation

Matthew Butlin, until this year South Australia’s Productivity Commissioner, said prices were rising quickly in asset markets such as those for land and shares.

“The pressure simply to recover the real value of wages, let alone increase their real value, will be significant,” he said. Australia risked a wage-price spiral.

Rana Roy foresaw temporary high inflation until high energy prices and supply chain disruptions passed, but “temporary” in the sense that the hyperinflation in Germany’s Weimar Republic was temporary, lasting from 1921 to 1923.

Suppressing the higher inflation would require deliberate corrective action.

Higher rates, but not yet

Asked when the Reserve Bank would next lift its cash rate to combat inflation, most nominated 2023. Only 15 of the 52 economists who answered the question expected a hike next year, putting the majority at odds with financial market pricing which backs in several hikes during 2022.

Reserve Bank Governor Philip Lowe said earlier this month he didn’t expect to have to lift the cash rate until 2024, a proposition backed by only 10 of the 52 economists who tackled the question.



Most (33 of the 55) believed the Reserve Bank had managed the economy well during the past five years, effectively used the tools available to it to achieve its goals of maintaining the stability of the currency, ensuring full employment and furthering the “economic prosperity and welfare of the people of Australia”.

Only 15 believed the bank had managed things badly.



Fabrizio Carmignani said it could be argued the bank had kept its cash rate too low for too long and also argued that it had failed to get inflation up to its target band, two apparently contradictory positions.

Paul Frijters said that by targeting the underlying inflation rate as calculated by the Bureau of Statistics, which excludes much of housing, the bank had “cooked the books” to avoid having to increase interest rates.


Read more: What's in the CPI and what does it actually measure?


John Quiggin said the bank should abandon its inflation target of 2-3% and instead target nominal GDP growth, doing whatever was needed to get the economy to grow at a nominal rate of 6-7%.

No clear case for an inquiry

The economists surveyed were divided about the need for an independent review of the Reserve Bank after next year’s election.

The Organisation for Economic Co-operation and Development and the International Monetary Fund have backed a review of the kind proposed by Labor, which would examine the bank’s mandate, board structure, and hiring and communication processes.



Asked about the idea in the survey, former Labor minister Craig Emerson said the bank had consistently undershot the 2% lower bound of its inflation target, causing unnecessarily high unemployment and low wages growth in part because it had targeted projected rather than actual inflation, and its projections had fallen short.

In October last year Governor Philip Lowe announced the bank would switch to targeting actual inflation, saying it would not be lifting its cash rate “until actual inflation is sustainably within the target range”.

Other panellists including Joaquin Vespignani argued that by targeting only measured inflation the bank had created “a bubble in the housing market which is not consistent with economic prosperity”.

More economists on the RBA board

Panellists including Ken Clements argued there was a case for appointing more board members with the economic expertise needed to challenge bank officials.

Former OECD official Adrian Blundell-Wignall argued the bank’s structure and goals were the broadly right ones. We should “not try to fix what isn’t broken”.

James Morley was concerned an independent commission of inquiry might be “highly politicised and lead to unrealistic expectations about what monetary policy can and should do”.

The Bank of Canada reviewed its performance and frameworks in cooperation with the federal government every five years, a practice that would work well in Australia.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Responses (55)


 

Peter Abelson

Uncertain

8

The main problems with ultra low interest rates over an extended period are disproportionately high asset prices, especially but not only in housing, that are not included in standard measures of inflation, including the CPI. Focusing almost exclusively on the CPI has created housing affordability problems and risks of loan defaults and financial instability when asset prices fall. Raising interest rates slowly now would steady asset prices and be a stabilising influence on the economy without having significant negative impacts on employment and output.


 

Garry Barrett

Disagree

8


 

Harry Bloch

Disagree

8

Australia has a small open economy with limited influence on world prices. The main channel through which fiscal and monetary policy in Australia influence prices of imports and goods that compete with imports is through the foreign exchange rate. The RBA could influence the foreign exchange rate through changing interest rates compared to corresponding foreign rates, but it has generally avoided doing this to avoid destabilising the foreign exchange rate and financial markets. The goal of stabilising the currency has taken precedence over other economic goals, which is appropriate given the RBA is best positioned to handle this particular economic goal. Prices of services, as opposed to goods, are less dependent on world prices, instead being most influenced by domestic wage rates. Wage rates in turn are influenced by labour market conditions including unemployment, bargaining strength of unions and government wage setting policies. While there has been talk of the need to increase wage growth, over the past five years governments at all levels have generally worked to suppress wage growth especially through limiting wage increases to their own employees. Inflation will eventually increase in Australia due to increases in world inflation pushing up prices of imports. The rising cost of living will increase pressure on governments to end suppression of wages of their own workers and to support improvements in the bargaining power of private-sector workers, leading to further inflation through increased prices for services. The rate of unemployment will play only a minor role role in this process as has been the case for the past two decades at least.


 

Adrian Blundell-Wignall

Agree

6

The independence of the RBA in the current structure with a focus on an inflation range is about right. Don't try to fix what isn't broken.


 

Alison Booth

Disagree

9


 

Robert Breunig

Disagree

6


 

Markus Brueckner

Agree

5


 

Matthew Butlin

Agree

7

The Bank has been clear and consistent in its approach on the macro economy and its settings have been highly appropriate. The economy has had a huge stimulus from both fiscal and monetary policy that - in conjunction with similar international policies - is beginning to produce inflationary pressures especially in asset markets. The pressure on wages growth simply to recover the real value of wages, let alone increase their real value, will be significant. This risks a wage price spiral. The Bank is, in my view, going to need to lift interest rates in 2022.


 

Fabrizio Carmignani

Disagree

9

While underlying inflation is at 2.1%, inflation expectations based on bond rates are around 1.5%, so there is no sign that financial markets are expecting an immediate surge in inflation. This is understandable given that the current increase in inflation is not due to the economy overheating. This also means that from monetary policy perspective, there is no need to rush into increasing the interest rate. One could argue that the RBA has kept the interest rate too low for too long and still failed to maintain inflation within the target band. This argument however would not take into account the fact that already before COVID, Australia was in a contraction, with a moderately negative output gap (according to IMF estimates) that had persisted for years. Under those macroeconomic conditions, a low interest rate made sense, even though eventually monetary policy ran out of steam. I am unsure about the independent review of the RBA. One of the principles of monetary policy is that the monetary authority should be independent of the fiscal authority: to what extent would the review affect RBA's independence?


 

Bruce Chapman

Disagree

9


 

Ken Clements

Agree

9

The RBA has substantial economic capabilities, and a reasonably good track record. But a major problem has been monetarising the deficit which threatens the independence of the Bank from government of the day. To maintain independence and credibility, the RBA needs to focus on one thing and one thing only, low and steady inflation. Forget month-to-month gyrations in unemployment, housing booms and busts, the "mood" of the bond market, and all other distractions from what the Bank can control -- inflation over the long term. One item for any Review of the RBA is the composition of the Board. It would benefit from more outside expertise in monetary economics to test, challenge and improve analysis presented by Bank officials.


 

Deborah Cobb-Clark

Disagree

5


 

Lin Crase

Disagree

6

There's obviously a lot of focus on interest rates at the moment, but a general absence of policy direction on long-overdue productivity improvements and tax reform. The RBA can't be expected to do it all.


 

Kevin Davis

Uncertain

10

The prospect of above target inflation depends on developments in the real economy as it emerges from the Covid shutdown. If a strong recovery and no change in policy settings then it could happen, but current monetary policy settings more likely to be fuelling asset price inflation rather than real sector inflation, and ?Covid-based automatic stabilisers? of fiscal policy settings will moderate any fiscal stimulus (particularly as current government likely to revert to aversion to deficits etc). Re interest rates, private sector demand for finance and upward pressure on longer term rates likely to lead RBA cash rate up, together with need to moderate asset (eg housing) price inflation.


 

Janine Dixon

Agree

3


 

Brian Dollery

Agree

7

The RBA is now at odds with national and international money markets on inflationary expectations.


 

Uwe Dulleck

Uncertain

5

Without question, the experience with RBA policy over the last couple of years has been positive. My main reason to support a review of the RBA is that I do find the political pressures on the RBA have changed. The (in my eyes inflated) house/real estate prices limit the ability of the RBA to increase interest rates without creating instability, as I feel many household in Australia are over exposed to in creases in interest rates. This situation, in my yes, leads to unpredictability - as market may bed/expect RBA interventions and whether and when such interventions are limited in their effectiveness is unclear. At the same time, these increases in real estate prices increase inequality by making it harder for first home owners entering the market. My worry here is that this will cause in the long term social instability, which then may trigger economic instability. But given that this would be a secondary effect, it may not be captured by the remit of the RBA.


 

Chris Edmond

Disagree

9


 

Craig Emerson

Disagree

8

The RBA has consistently undershot the 2% lower bound of its inflation target causing an unnecessarily high exchange rate and unnecessarily high unemployment and low wages growth. It should not have set its monetary policy on the basis of its projections of inflation but on actual inflation, since its projections of inflation were wrong.


 

Saul Eslake

Disagree

8

Fiscal policy is set to be tightened significantly over the next two years - albeit largely as a result of a combination of the expiry of time-limited spending programs (introduced in response to the pandemic) and ?bracket creep? - so it is hard to see Australian economic policy settings being the cause of ?protracted inflation? (although it?s possible that the policy settings of other large economies could result in higher inflation globally from which Australia might not be completely immune). I found the question on whether the RBA has used its tools ?effectively? to achieve the goals stipulated in its enabling Act a difficult one to answer. Self-evidently, the RBA failed to meet its inflation target for more than 5 years - but does that mean it failed to ?maintain the stability of the currency?? Equally self-evidently we haven?t had ?full employment? during the past five years - but is that the result, primarily or even in large measure, of a failure on the RBA?s part? Yes, of course the RBA could have lowered interest rates by more than it did over that period - but can we be sure that would have got inflation closer to the target, or employment closer to ?full employment? - rather than simply generating more rapid house price inflation (which seems to have been the main, albeit unintended, consequence of lowering interest rates to the levels which have prevailed since March last year)? Surely one can?t pin these shortcomings entirely on the RBA without having regard to what fiscal policy was doing at the same time (ie, being progressively tightened in pursuit of the goal of ?returning to surplus?. I think the RBA has been right to insist that it won?t raise the cash rate until (a) the labour market is sufficiently tight to (b) generate wage inflation that?s sufficiently rapid to (c) push ?underlying? price inflation sustainably into the 2-3% target range. Where I think they?ve erred is in being so dogmatic as to when those conditions might be satisfied - that is, by putting a date (2024) on it, rather than (as, I think, every other ?advanced? economy central bank has done) using vaguer language such as that ?it will take patience and time for these goals to be achieved?. I don?t think the effectiveness of the RBA?s responses to the economic consequences of the pandemic has been enhanced by putting a date on the timing of the first step towards ?normalisation? of monetary policy - something which no other central bank has thought it necessary to do. Rather, specifying a date has set up the potential for what can be portrayed in the media as some kind of ?contest of wills? between the RBA and the bond market which serves no useful purpose - and also created a possible ?PR? problem for the RBA in the event that it is ultimately necessary for it to start lifting the cash rate before 2024. I haven?t previously seen a compelling need for an ?independent review? of the RBA - but since many other countries have had one (or, alternatively, central banks such as the Fed an the ECB seem to have undertaken a fair bit of genuine introspection), such a review of the RBA would, provided it had sensible terms of reference and was conducted by credible people, at the very least do no harm.


 

ALLAN FELS

Disagree

8


 

Gigi Foster

Agree

4


 

John Freebairn

Uncertain

5

There are many sources of uncertainty about the future path of the Australian economy, and then for appropriate fiscal and monetary policy. As each month and quarter roles by, new information becomes available about the state of the economy and its prospects. Government policy should adapt to the forthcoming information. Accepting broad policy objectives such as employment and inflation levels, in this adaptive policy world, setting policy interventions such as interest rates and budget deficit/surplus for a year or several years into the future makes little sense. In particular this strategy rules out sensible adjustments as changes in economic conditions are revealed. I would rank a review of the RBA which requires scarce economics skills and political support as much lower priority than other issues, including review and reform of commonwealth-state financial arrangements, energy policy, and industrial relations.


 

Paul Frijters

Agree

6

The RBA uses its own ("underlying") inflation rate which is lower than the main inflation rate to make these decisions, now about 3%. https://tradingeconomics.com/australia/inflation-cpi). Its inflation rate also misses much of the current housing price increase which is where much of the extra money printed during the great covid panic has gone. So the RBA cooks the books to avoid having to increase interest rates. Why it does this is a bit mysterious, probably reflecting the power of the property lobby, but it means that guessing the cash rate and interest rate becomes a game of guessing the politics rather than the economics. Independent reviews in the politics of Australia have proven not to be independent, nor are any politically painful findings implemented. Just think of the last Royal Commission on banking. So given the present quite maffiosi state of Australian politics, I can see no point in an independent review of anything.


 

Renee Fry-McKibbin

Uncertain

10

The economy is experiencing never before seen simultaneous demand and supply shocks on a global level. Supply chains, pent up demand, economic uncertainty and increased savings as well as loose monetary and fiscal policy settings and an ongoing health crisis make it difficult to judge whether we could have a period of prolonged above target inflation. Asset price inflation is a major concern and a correction could have a negative effect on the economy.


 

Lata Gangadharan

Uncertain

7


 

RICHARD HOLDEN

Disagree

8

The RBA was too slow to cut rates in 2018-19. They stubbornly refuse to announce their policy reaction function. The governor sends horribly mixed messages that seem clumsy rather than strategic. The estimate of the NAIRU having dropped markedly was announced in a minor speech by Assistant Governor Luci Ellis. And the bank never accepts they could ever do anything even a little bit better. All this and more should be the subject of an independent review.


 

Michael Keane

Disagree

5

If it ain't broke, don't fix it.


 

Michael Keating

Disagree

6

A simple "yes-no" answer to question 3 about RBA performance does not make sense. On balance, the RBA did more of a good job than a bad job, but it consistently over-estimated wage and price inflation, implying that unemployment was higher than necessary, and this probably impacted investment and productivity. No-one can know whether a Review of the RBA is a good idea without seeing the terms of reference.


 

Geoffrey Kingston

Agree

6

The Bank has done a decent job over the last five years. Some critics have over egged their case. True, pre-cCOVID inflation came in below the target range, but so did inflation in the major Western countries. We needed to follow suit to prevent an excessive pre-covid depreciation of the AUD. ?Stability of the currency? has an external dimension, and the Bank has recognised this. A valid criticism of the Bank is that it needs a 1-3 percent inflation target range rather than the current 2-3 percent.


 

Michael KNOX

Disagree

10

The RBA is still providing an expansive monetary policy through Quantiative Easing. The RBA is is still buying $4 billion of bonds per week . We believe that in February it will announce a reduction in purchases to $3 billion per week and then reduce the rate of purchase each quarter through 2022. This puts the RBA in a position where it can lift the cash rate from 10 basis points to 25 basis points in the first quarter of 2023. We believe that inflation in Australia will be contained as import prices fall in Australian dollar terms as the Australian Dollar gradually rises supported by strong export commodity prices.


 

Emily Lancsar

Disagree

6

Re Q1- policy would not be static, inflation would lead to a monetary policy response. On Q4 - public institutions in general should be reviewed and this would be in step with other central banks around the world.


 

Guay Lim

Disagree

7

It is still not clear that actual inflation will remain "sustainably within the 2?3% target range? in 2022. There are signs of an economic recovery but activity is still adapting to a "new normal" and growth in wages is still expected to remain modest.


 

Elisabetta Magnani

Disagree

6

The various inflation measures, including CPI, producer price index, tradeable and non-tradeable inflation rates portrait a complex scenario where clear forecasts about future inflation are difficult. Supply side factors that will be important to consider are those related to disruptions to global value chains. Demand factors depend on both domestic and international scenarios including the troubles of the Chinese economy. Acting too quickly and too soon in response to this complexity is not productive particularly because the RBA is committed to full employment as well as inflation targets. The ASB September 2021 reports that the labour markets show enduring signs of weakness. There are also underlying structural and long-term challenges, including those that are necessary to address climate change, that are best tackled in a context of low interest rate, if Australia is to take advantage of this relatively positive condition.


 

Tony Makin

Agree

10

The RBA needs to justify why Australia has a 2-3 % inflation target. Why not 1-2 % or simply 2 % as in the UK, the US and Europe? The RBA's goal of achieving higher inflation by stoking aggregate demand to reduce unemployment and increase nominal wages, consistent with the Philips Curve, is also ill-founded. Milton Friedman and Edmund Phelps argued that any trade-off between unemployment and inflation would only be short-term because ultimately unemployment cannot be artificially lowered below the ?natural" rate, probably closer to 5 per cent than 4 percent. If inflation rises due to aggregate demand-induced wage pressures, this will further worsen international competitiveness and not improve real wages. Real wage growth stems from productivity improvement, a supply-side phenomenon. In recent years, the RBA has also been encouraging substantial fiscal stimulus beyond its remit. Mimicking other central banks, the RBA has boosted the money supply excessively via ?quantitative easing? effectively funding the big increase in government spending. This has caused highly inequitable and unsustainable asset price inflation, reflected in high share and property prices. The lessons from economic history on the money supply-inflation link have apparently been forgotten. With inflation running at over 6 % in the United States, over 3 % in Europe, and expected inflation here close to 5 %, a repeat of the high inflation of the 1970s seems inevitable on current monetary policy settings.


 

Warwick McKibbin

Agree

7


 

Flavio Menezes

Disagree

8

The notion of an independent (from politics) central bank became universally accepted as good economics about three decades ago. The global financial crisis and more recently the response to the COVID-19 pandemic made it clear that central banks, in practice, operate in a way that shares many characteristics with other government functions. While there is merit in considering alternative governance arrangements for the RBA that recognise its broader role, I am uncertain about what an independent review of the RBA can accomplish given that a ?better central bank model? is yet to be developed.


 

James Morley

Disagree

10

The main risk for the Australian economy is not that there will be above-target inflation, rather it is below-target inflation. Even though year-on-year headline inflation was 3.0% to September 2021, the annualised rate of inflation over the two years since September 2019 is only 1.8% per year. The 10-year break-even inflation rate in the bond market is 1.9%. Underlying measures of inflation are back in the 2-3% target range, but at the low end at 2.1% and they could easily fall back below 2% when the base effects of the low inflation during 2020 from the Covid crisis wear off. I would take the RBA at its word in terms of its latest forward guidance that lift-off will most likely occur at the beginning of 2024. The main risk I see to this would be the need for a delay in lift-off to later in 2024 if inflation is running below the target range at the end of 2023. Even if inflation is somehow at the high end of the target range or even slightly above in mid 2023, the RBA will want to re-establish its credibility with financial markets, which are currently expecting a much earlier lift-off, by sticking to its stated plans. The only thing I could see that would bring lift-off earlier would be if the 10-year break-even inflation rate exceeded the 2-3% target range for a sustained period of more than quarter or two before the end of 2023. However, I think this is only a remote possibility. When the 10-year break-even inflation rate fell persistently below 2% in late 2018 and through 2019, the RBA should have engaged in forward guidance at the time to make clear the primacy of achieving its inflation target rather than other goals that could be at odds with doing so. With the Covid crisis, the RBA responded quickly, with much clearer communication around unconventional policies. However, there is still a credibility gap given that many financial market participants expect lift-off much sooner than the RBA. The recent abandoning of yield-curve-control risks that credibility further, with the corresponding increase in certain interest rates by the banks being counter-productive to the RBA bringing inflation sustainably back into its target range. The RBA needs to be more definitive with its communication strategy and make clear its commitment to keeping rates "lower for longer". Planning to and keeping the OCR at the effective lower bound until the beginning of 2024 will be important in getting financial market expectations to converge to the RBA's expectations. The RBA needs to make it crystal clear that its expectations are not influenced by financial market expectations, but rather by the best path for policy to bring inflation sustainably back into the target range. I think the RBA should follow other central banks such as the Bank of Canada that carry out 5-year reviews of their policy framework. Such reviews should evaluate what worked and didn't work with past policies, as well as considering what would have happened under alternative policy frameworks such as nominal GDP targeting or price level targeting. I personally believe that, compared to these alternatives, flexible inflation targeting is the preferred framework given its transparency and comparative ease of communication (i.e., people actually form expectations about inflation, not so much nominal GDP growth given there is generally a fair amount of heterogeneity in nominal income growth for households depending on age and sectoral changes in the economy). A central bank should always be conducting research into the viability and costs/benefits of alternative frameworks. An important aspect of a formal review of a policy framework is that it needs to have outside expert input and not be politicised. My worry with having an "independent" commission into the RBA is that it will be highly politicised and lead to unrealistic expectations about what monetary policy can and should do. Politicians could become too easily enamoured with fiscal-policy-by-proxy ideas about monetary policy, rather than take their own fiscal responsibilities under democratic oversight seriously. It would be too easy for such a commission to become a blame-shifting exercise and lead to counterproductive restrictions on the ability of the RBA to achieve objectives such as low and stable inflation in the future. But the RBA does need to demonstrate that it engages in serious self-reflection of its monetary policy practices and consideration of viable alternatives to its current policy framework. A regular 5-year review of their policy framework that involved Bank staff and outside experts, again such as done by the Bank of Canada and other central banks, would be a useful means of improving the practice of monetary policy. For reference, information on the Bank of Canada's periodic 5-year review is available at https://www.bankofcanada.ca/toward-2021-renewing-the-monetary-policy-framework/.


 

Margaret Nowak

Uncertain

7

The outcomes over the near term will be dependent on external conditions at least as much as domestic policy settings. On these there are many uncertainties. In particular China, but it is by no means clear that recovery following Covid will take a linear upward trajectory in the rest of the world, nor that there will not be setbacks in the move to "living with Covid.


 

A Abigail Payne

Uncertain

5


 

Alison Preston

Disagree

7

There are concerns that inflation may be running high but a commonly held view (e.g. IMF) is that it is temporary and that it is under control. What is unclear in Australia is how the Stage 3 tax cuts (due to kick in July 2024) will affect demand and inflationary pressures and what might happen to prices in response to climate policy. That said, I still have confidence in the Reserve Bank?s ability to keep inflation under control. Do I think there is a need for an independent review of the RBA? Based on the commentary of some former RBA Board members (such as Prof. Warwick McKibbin) it would seem that there is a case for an independent review of the structure and the role of the RBA Board. McKibbin, for example, advocates that the Secretary of the Treasury should not have a voting role on the RBA Board to avoid conflicts of interest.


 

John Quiggin

Disagree

8

The inflation targeting framework is misconceived. Australia should switch to a nominal GDP growth target of 6-7 per cent. That allow for interest rates to be well above zero in nominal terms but negative in real terms, consistent with the fact that the long-term neutral real interest rate is now near zero.


 

Mala Raghavan

Disagree

8

There is a possibility the RBA will start increasing the cash rate either in late 2023 or early 2024. I trust the RBA tried its best to achieve price stability and low unemployment. However, I am not sure if the continuous accommodative monetary policy measures implemented in the last five years provided equitable economic prosperity and welfare outcomes for many Australians. It is probably a reasonable idea to commission an independent review, to objectively scrutinize the decisions made by the RBA board. However, the challenge is finding the right mix of reviewers, who are independent and free from any political and commercial/industrial baggage.


 

Leonora Risse

Disagree

8

The RBA has made it clear that its monetary policy decisions are based on the state of economy, not the calendar. The question of when to expect the RBA to lift the cash rate is therefore a question about when we can expect to see inflation move into the 2-3% target range. And for this to be reflective of a strengthening economy, rather than due to the transitory supply shocks that we are currently experiencing. A small dose of inflation is generally considered a sign of a healthy and dynamic economy, as long as wages are keep up with price rises, to preserve consumers' purchasing power. The RBA has highlighted that it is also monitoring wage growth as the other key sign of strengthening economic conditions. It is forecasting for this to pick up over the next 6 to 12 months. The challenge for the Australian economy is that, despite high job vacancy numbers, these expansionary signs might not flow through to higher wages all that quickly, especially given the uncertainty and cost pressures that many employers are facing. Also more employers and employees are likely to negotiating non-wage factors, such as retaining flexible working-from-home arrangements, and this won't show up in wage growth data. On the question of whether the combination of fiscal and monetary policy poses are risk of over-shooting the inflation target range, we have to acknowledge that monetary policy, determined by the RBA, is a blunt instrument that influences aggregate consumption and investment activity very broadly. In contrast, fiscal settings, determined by the government, can be more targeted. To avoid prolonged inflation, fiscal policy needs to avoid stimulating demand in areas that cannot be matched by higher supply (i.e. don't keep incentivising building when there is shortage of construction supplies). Stability, integrity, and trust in our economic and governing institutions are core to a well-functioning and thriving economy. Conducting regular reviews of our economic institutions, as has been done for Central Banks in other countries, can be a healthy way of maintaining this public trust as well as assessing whether their mandates and decision-making frameworks are still fit for purpose as high-level priorities, such as climate risks, emerge or change over time. For example, as an outcome of a recent review, the European Central Bank has decided to incorporate a climate change action plan into its policy framework. The recent review of the US Fed included a focus on improving public communication strategies. The Bank of England was subject to reviews that scrutinised its handling of the GFC. In relation to Australia, I don't know enough about this issue to be able to say whether a review of the RBA is warranted, and whether there has been sufficient groundwork to justify the government commissioning a review at the present time. However I would emphasise the importance of ensuring that the issue does not become politicised and that the process of undertaking a review does not, in itself, destabilise public confidence and trust in an institution that is fundamental to the stability of the Australian economy.


 

Rana Roy

Agree

9

Re Q1: Any answer to this question needs to define the term ?prolonged? more precisely in order to be meaningful. Inflation as measured by the official Consumer Price Index is currently running above target across the OECD world, including in Australia (and in the United States, where it is now at 6.2% per annum, the highest in three decades: see https://www.bbc.com/news/business-59236432). According to The Economist, ?most economists? think that this is ?temporary?, ?transitory?, and that ?it will pass?: see https://www.economist.com/graphic-detail/2021/11/06/a-handful-of-items-are-driving-inflation-in-america I too think that the current episode of inflation ?will pass?. But I think it will pass after years rather than months. My best guess is that it will run from 2021 to 2023 ? roughly the same period of time as the ?temporary?, ?transitory? inflation that obtained in the Weimar Republic from 1921 to 1923. Moreover, I think that supressing this inflation will need deliberate corrective action: it will not pass of its own accord. Energy prices are likely to remain elevated for some time; supply chain disruptions will be overcome but the reconfigured, more-regionalised supply chains are likely to be more expensive than the global supply chains of yesteryear; consumer prices across the board will reflect these higher input prices; and wages will chase prices higher, and already doing just that. Re Q2: With the notable exception of Turkey, central banks across the OECD world will surely lift interest rates from the floor before inflation gets wholly out of control. My best guess ? and it is only a guess ? is that the RBA will act in 2023, as will the ECB, and that the US Fed and the BoE will be obliged to act sooner, i.e., in 2022. Re Q3: One of the most welfare-consequential results of the combination of monetary, fiscal and general government policies over the past 5 years (and more) has been the grotesque inflation in the price of housing and, with it, the unearned enrichment of some Australians, the unearned suffering of other Australians, and the wholly unjustifiable widening of the inequality in wealth, status, and dignity, between the two groups. Now it is true that the main responsibility for this outcome, and therefore the main blame for it, lies with successive governments, and not with the RBA. It is also true that, on a personal level, every RBA official with whom I have conversed on the matter has been cognizant of and sensitive to the issues at stake. Nonetheless, institutionally, the RBA does bear its share of responsibility. Its decisions to deliver negative real interest rates, quantitative easing, and now above-target CPI inflation have been a factor in this outcome, enabling property-owners to pay off their debts, and to acquire yet more property, with undeserved ease ? as indeed did the indebted Prussian Junkers in the days of the Weimar Republic. Re Q4: Reviews and Royal Commissions have their place. The Royal Commission on banking practices revealed hitherto undisclosed facts and resolved hitherto disputed facts. This was an important achievement ? even if, to quote the words of a recent Nobel Laureate, it remains the case that ?All the criminals in their coats and their ties/Are free to drink martinis and watch the sun rise?. But the issue here ? in summary: how best to reconfigure the division of labour between monetary and fiscal policy so as to maximise the chances of delivering outcomes that maximise the general welfare ? do not involve undisclosed or disputed facts. It can be resolved only by a future Government that seeks to promote rather than subvert the general welfare.


 

Jeffrey Sheen

Disagree

10

The risk of excessive inflation is small since a sustained rise in wages is unlikely. Current inflation is mainly due to logistical supply shortages that should resolve soon. The RBA has done an excellent job in 2020-1 communicating and responding in innovative ways to this unique health-induced downturn. An independent review of the RBA is unnecessary. However it may be useful for the RBA and the government to revisit their 2016 Statement of Agreement on Monetary Policy to clarify the appropriate macro-prudential responses to asset price inflation or deflation. A similar and consistent agreement with APRA would be desirable.


 

Nigel Stapledon

Uncertain

6

Inflation in Australia is not simply a function of domestic factors. With US inflation hitting 6% and constantly surprising on the upside, I see a risk that central banks have under-estimated the inflation threat. Where the US goes, we will surely follow. Secondly. I think central banks generally have overused easy money and underplayed the asset inflation risks, particularly in the case of property. The objective might be to promote growth and employment via stimulus to property (construction) but historically property busts pose a risk to that objective. Not an immediate risk in Australia but certainly a major risk to China's economy at present which poses an indirect risk to Australia. On the review, I think the 2-3% target needs to be reviewed. It might have seemed ambitious in the early 1990s but in the 2000s, a lower target would be easily achieved. And lower inflation will in the long-term be better for the economy.


 

Joaquin Vespignani

Disagree

9

I believe that an independent review of the RBA is necessary. The review should also consider the role of the Australian Prudential Regulation Authority (APRA) in stabilising house prices. The current problem is that the Australian cash rate is consistent with the inflation target and low unemployment mandate. However, this low-interest rate has created a bubble in the housing market which is not consistent with ?Economic prosperity and welfare of the Australian people ? also stipulated in the RBA mandate. APRA should follow a clear rule to move the minimum interest rate buffer using ?House prices inflation-target?. This could substantially reduce the risk of a boom and bust scenario in the housing market by curving house price expectations, helping the RBA to focus only on inflation target and employment. Concerning current inflation, I expect higher inflation until the second quarter of 2022 (temporary shock). Afterwards, most disruptions in the supply chain (which are the cause of high inflation globally) will subside. The RBA reading of this inflation shock is correct in my opinion.


 

Rachel Ong ViforJ

Disagree

7

There is in fact a limited range of tools available to the RBA, so I would say they have done the best they can with what they have. However, a spillover consequence of prolonged periods of low interest rate is the the huge impact this has had on housing demand, pushing up house prices and worsening home purchase affordability for would-be homebuyers. The RBA have repeatedly indicated that these are outside the scope of their remit. However, I would argue that housing affordability plays a particularly important role in supporting the economic prosperity and welfare of the Australian people. So if there was to be a review, I would strongly propose that this idea that housing is outside the scope of the RBA be challenged.


 

Beth Webster

Disagree

7

The current risk of prolonged above target inflation is very low. Although there are signs of higher inflation in the US and inflation can be imported, Australia has its own labour market institutions and own set of policy tools and is therefore not totally beholden to world events. Even before the pandemic, the RBA was undershooting their target and was not hitting the zero lower bound. An independent review is needed because the undershooting went on for about 5 years. Most central bank boards are more dominated by economists than the RBA. A refocus on unemployment would better serve the people of Australia.


 

Danielle Wood

Disagree

7

Recent macro policy settings ? both monetary and fiscal ? look like they will support a strong recovery, assuming the vaccine is effective on future variants of the virus. Higher inflation today now in many ways reflects this success in supporting demand, while long-term inflation expectations remain well anchored. The economic outlook could have been much worse than it is today. Nonetheless monetary policy can respond to above-target inflation if clear concerns were to arise that it would be persistent, although the RBA should probably look through short-term supply-side inflation arising from supply bottlenecks as the global economy reopens post COVID. Looking further back, the Reserve Bank's performance is less positive. Before COVID, Inflation had been below its target for more than half a decade, unemployment was substantially higher than it could have been, and growth was sluggish. A review should look at history particularly to inform questions about whether the monetary policy framework remains fit-for-purpose. But a review should not be primarily about dissecting past decisions. Instead it should focus in the challenges facing the RBA and central banks around the world, and the way forward. Monetary policy has been under strain globally, as interest rates have fallen and conventional monetary policy has become less potent. The drivers of declining interest rates ? ageing populations, rising wealth inequality ? are global, and likely to persist. Which means rates are likely to remain lower, for longer, even as the world moves past the COVID crisis. A review should be broad in scope. It should seek to shed light on the trade-offs faced using different policy instruments, particularly under the constraints of the zero lower bound and secular stagnation. And it should consider the central bank mandate, targets and governance arrangements.