For much of the past year, RBA governor Philip Lowe has been public enemy number one as he presided over the nation’s most aggressive central bank rate hike cycle ever.
Not only have Aussies seen their mortgage repayments skyrocket by thousands of dollars a year, but there have been a series of forecasting errors in the lead up that influenced the financial decision-making of a lot of people…people who are now feeling serious pain.
The most famous one was the repeated implication that rates wouldn’t rise from their 0.1% low point until at least 2024.
As far as miscalculations go, that was a doozy.
But, all that aside, inflation has flown under the radar to a point where it suddenly revealed itself as a major catastrophe-in-waiting for the economy.
It needs to be tamed, and as Lowe often points out, interest rates are the only tool he has to try and do so.
Whether you agree or not with the RBA’s strategy, which has seen home loan borrowers hit with 3.75% worth of rate rises in 12 months, it doesn’t make much difference.
Lowe has said the most important thing he needs to do is get inflation under control. And he is prepared to be tough to do it.
One of the biggest issues with manipulating the cash rate as an economic tool is that only about 35% of adult Aussies have a mortgage to pay off. And these people are at stages in their life where they are less likely to be spending freely than those who have paid off their mortgages.
So it seems unfair that borrowers have to pay the price for excessive spending that they aren’t necessarily doing.
Meanwhile, those without mortgages are getting higher rates on their cash products such as high interest savings accounts and term deposits. This means their returns are greater and, ironically, they are more likely to spend.
The housing crisis and potential cliff facing borrowers has become a regular fixture in the news cycle and has therefore found its way onto the priority list of the nation’s politicians.
What can they do about it?
Some people had originally suggested that rather than the RBA hike rates, the government should simply increase the GST to 15%. But a policy like that would likely need to go through a lengthy period of debate and revision in parliament, or be taken to an election in order to gain a mandate…and good luck to any political party gambling its future on a policy to raise taxes.
So the politicians decided to do what they do best…conduct a review.
Fast forward to the end of April and the review had handed down 51 specific recommendations, which related to two main common themes: communication and transparency.
The aim is to have a broader input into decisions affecting the cash rate; and for those decisions to be communicated in a clearer, concise way to the public.
Break it down
The main change off the bat would be to split the RBA’s board into two. One half would look after monetary policy and the other half after corporate governance.
The monetary policy board would look after cash rate decisions and would see the governor, deputy governor and treasury secretary joined by six external members (business leaders, economists, academics, etc), who would serve for 5 years with staggered end dates, and who would specialise in different areas.
It would meet 8 times a year instead of the current 11 to decide on interest rates. The thinking here is that there would be more time to analyse and consider the effects of previous decisions on the economy, allowing for “lag”.
The RBA governor would then hold a press conference after the board meetings, rather than simply issue statements about the decision. This would allow journalists to have the governor explain and elaborate for the benefits of the community.
The corporate governance half of the board would look after the operations of the central bank and be headed by an external chair, rather than the governor.
Sounds good, when will it happen?
The Albanese government accepted the recommendations in principle…now comes the fun part. The opposition must review the recommendations and decide whether it supports them also.
The two sides then set about passing legislation to make them official.
Judging by the normal processes and priorities of parliament, it will still be more than 12 months from now when any reforms come into play. So, we may be waiting for July 2024 and a new financial year before meaningful change comes into effect. It will be interesting to see what happens to rates between now and then.