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The Reserve Bank and the federal government need to jointly deploy inflation policy, using different tools to overcome different outbreaks of inflation, the Australian Greens say.
Key points:
- The Reserve Bank should be helping to direct the flow of credit in Australia's economy to more productive ends
- It should help governments to transition to a low emission economy
- Monetary policy and fiscal policy have to be better integrated
They say the Albanese government's review of the Reserve Bank of Australia (RBA) should also confront the limitations of independent central banking as it's currently perceived.
Senator Nick McKim, the Greens' treasury spokesman, says the RBA must become more accountable for the consequences of its policies, and it should accept some responsibility for making inequality worse since the 1990s.
He says current monetary policy arrangements also need to be re-imagined to help Australia confront the climate emergency.
That would include getting the RBA and government to play a more active role in directing the flow of credit to productive ends, particularly the transition to a low-emission economy, and to discourage the flow of credit to speculative ends, particularly highly leveraged property investment, he says.
"This policy would be given effect through prudential regulation and the RBA's use of its own balance sheet," he said.
The RBA board and voting decisions
Senator McKim has used his submission to the RBA review to call for a number of changes to the way in which monetary policy is conducted in Australia.
He said under central bank "independence", which has existed in Australia since the 1990s, monetary policy had become disconnected from democratic processes.
He said the RBA had to become more democratically accountable, and monetary policy needed to be better-integrated with fiscal policy to help Australia deal with the crises of the 21st century.
When it comes to the RBA board, he said the voting records of the bank's board members should be published after every monthly interest rate decision, with members allowed to publish additional or dissenting comments.
He said the federal treasurer should provide written instructions to the treasury secretary ahead of every RBA board meeting, setting out the positions the government wants the treasury secretary to take on decisions of the board with the aim of better integrating fiscal and monetary policy, and the RBA board should respond to the positions of the treasury secretary in the minutes of its meetings.
He also wants the entire RBA board and the treasurer to appear together before a public hearing of a parliamentary committee at least twice a year, and for the RBA board to become more diverse.
"The RBA is far more likely to meet its objectives if the members of the board reflect a diversity of interests and expertise," he said in his submission, seen by the ABC.
"The current board is tilted towards the priorities of business, but has no-one representing workers."
He said the RBA Act should be amended to require, along with the current appointment of the governor, deputy governor and treasury secretary, that the board has:
- One member appointed by trade unions
- Five independent members, appointed by the treasurer, and who together provide a diversity of expertise relevant to achievement of the RBA's objectives
- These five members must include no more than one person who is an executive or on the board of a large Australian company
- The appointment of no fewer than four women in total to the board
The RBA's blind spot on housing and the welfare of all Australians
Senator McKim also called for a larger overhaul of monetary policy arrangements.
He said the era of central bank "independence" in Australia had coincided with a structural decline in interest rates and a monetary policy regime that had been agnostic about the flow of credit, and it had contributed to Australia's housing crisis and growing economic inequality.
He said the "financialisation of housing" had been one of the "defining features" of the era, and it had been inconsistent with the RBA's primary duty "to ensure that the monetary and banking policy of the bank is directed to the greatest advantage of the people of Australia".
"Thirty years ago, Australian banks lent twice as much to business as they did for housing. Now they lend twice as much for housing as they do for businesses," he said in his submission.
"Land price inflation, facilitated by monetary and prudential policy, is fuelling inequality, with landowners being enriched at a faster rate than non-homeowners, to the point where people are earning more from land price inflation than they are from working.
"This is assisting the economic prosperity and welfare of some of the people of Australia, but it is not assisting the economic prosperity and welfare of all of the people of Australia, and it is one of the primary drivers of inequality," he said.
To fix the problem, Senator McKim said prudential regulation should be shifted from the Australian Prudential Regulation Authority (APRA) to the RBA, because under current arrangements neither institution accepted responsibility for soaring property prices.
"For example, in March 2021, as house prices began to rise rapidly, both the RBA and APRA wiped their hands of responsibility," he said.
"RBA Governor Philip Lowe stated that the 'RBA does not target housing prices, nor would it make sense to do so'. APRA chair Wayne Byres said 'it's not our job to solve house prices; it's not our job to solve affordability'.
"Having the nation's two macroeconomic banking regulators play pass-the-buck while the biggest asset class is inflating at the fastest rate on record gets us no closer to ensuring the economic prosperity and welfare of the population."
The RBA and government should work together to manage inflation
Senator McKim also wants far more integration between fiscal policy and monetary policy.
He said the federal government should work more closely with the RBA to tackle inflation, on the understanding that monetary policy was ill-equipped to handle every inflationary outbreak alone.
He said that would become more apparent amid more inflation from climate change-related disruptions to supply chains in coming years.
"Monetary policy is a blunt instrument and, as has been demonstrated recently, one that is particularly ill-suited to tackling supply-side inflation," he said.
"The RBA cannot and should not take sole responsibility for price stability, and neither should it pursue price stability at the expense of fulfilling its legislated duties.
"The RBA and the government should jointly deploy economic policy tailored to respond to specific inflationary pressures depending on their nature.
"This should include, but not be limited to, tax policy, financial regulation, price regulation and supply chain support."
The climate emergency and government funding
Senator McKim said the RBA also needed to be placed at the centre of Australia's response to the global climate emergency.
That would mean the RBA breaking with the orthodoxy that discourages central banks from directing the flow of credit.
"The breakdown of the planet's climate and ecological systems threatens Australia's economy and society, and the world's economy and society," he said.
"We face ecological and civilisational collapse unless we keep global warming below 1.5 degrees.
"However, the breakdown of the climate will also require changes to monetary policy that collides with neoliberal ideology.
"The RBA and the government must develop a credit policy."
Senator McKim said the decision over who controls the volume and direction of credit had always been a fundamental economic policy question, but it had largely been absent from public debate in recent decades.
However, he said the inequality crisis and the climate emergency called for the RBA and the government to play a more active role in directing the flow of credit together.
"This policy should: encourage the flow of credit to productive ends, particularly the transition to a low emission economy; and discourage the flow of credit to speculative ends, particularly highly leveraged property investment," he said.
"This policy would be given effect through prudential regulation and the RBA's use of its own balance sheet.
"It is worth noting that the RBA already has the power to direct the flow of privately issued credit. The advance powers under Section 36 of the Banking Act 1959 give the RBA the capacity to instruct banks to follow policy regarding the loans they make."