RBA Independence at Risk

The ongoing uncertainty on the Reserve Bank Governor’s tenure is damaging the Bank and Australia’s capacity to restrain inflation.

Inflation is out of control in Australia - it is almost double the rate in comparable nations.

A Governor has not been removed during a tightening cycle. This prospect and the related uncertainty is bad for the economy which is battling under persistently high inflation.

For months, the Labor Government has been running a sometimes personal campaign against Governor Lowe.

This campaign is seemingly culminating in the end of Lowe’s tenure and his replacement to be made from a shortlist of names briefed to the media.

There are two points to make on these developments.

Firstly, cutting Lowe will not reduce inflation. The political trick of cutting Lowe will only mask the problem. The only person who can fix inflation is the same person about to sack Lowe: Jim Chalmers.

But Chalmers has to do this by ending new spending commitments. The only reason the officials described the budget as neutral at Budget Estimates was because of the price caps. Does any serious person think the Parliament can legislate away inflation? It is laughable. The new spending in May’s budget was clearly inflationary.

Secondly, the removal of a Governor during a tightening cycle will permanently damage the institutional framework of the Bank. It will reverse Peter Costello’s efforts to formalise the Reserve Bank’s independence which saw interest rates rise during the 2007 election campaign without interference.

We need independence, not interference as we had in the early 1990s under Chalmers’ hero Paul Keating.

The last time there was this much interference was when Keating installed his mate Bernie Fraser into the job followed by the recession ‘we had to have’. We had record high-interest rates, high inflation and high unemployment. We must not undo 30 years of RBA independence.

If Lowe is cut by Chalmers for doing his job, a future Governor will always be looking over their shoulder. Risking the independence of the institutional framework risks locking in high inflation and an economic slowdown.

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