Credit:<\/span>Sydney Morning Herald <\/cite><\/p>\nIt seems likely we will see another half a percentage point increase in interest rates from the RBA today. Adding to the 1.75 percentage points of rate hikes they have already put in place since May, it\u2019ll be a tough pill to swallow in the face of the escalating cost of our essentials.<\/p>\n
But the RBA is, in fact, lifting rates for a very good reason. It needs to slow down inflation because rapidly rising prices are bitter, especially for vulnerable people. They eat into household budgets, stymie business activity, threaten jobs and strangle the economy.<\/p>\n
Economists know, because empirical evidence tells us, that as higher interest rates cascade through the financial system making credit more expensive, businesses and households demand less of it, effectively slowing their spending.<\/p>\n
Households that already have debt have less money to spend on the non-essentials. And falling house prices make households feel less wealthy and less inclined to spend. Higher interest rates also cause the Australian dollar to appreciate (at least relative to where it would otherwise be) making imports more expensive, causing us to buy less of them.<\/p>\n
It\u2019s a delicate balancing act, because the RBA is setting interest rates for a future it can only forecast, not fully foresee. Lowe describes the path ahead as a \u201cnarrow one\u201d.<\/p>\n
It can feel like the RBA is not equipped to talk to everyday people whose everyday lives are affected by its actions. But the reality is, the bank is primarily concerned with managing inflation to keep it low and stable. It has other jobs, including issuing banknotes and financial market regulation, but inflation targeting is at its core.<\/p>\n
If it really has to, the RBA will put some people out of work to get inflation down. It will cause mortgage stress for others.<\/p>\n
When the business cycle is moving in the other direction and inflation is very low, it will cut rates and put upward pressure on asset prices. That\u2019s great if you\u2019re a Baby Boomer with a secure house and a wholly or partly paid off mortgage. But not if you are just starting out, walking away from auction after auction, feeling defeated.<\/p>\n
There are many things the RBA can\u2019t do, shouldn\u2019t do and isn\u2019t trying to do.<\/p>\n
It isn\u2019t trying to make access to the housing market easier. It isn\u2019t giving income support to those that lose their jobs. And it isn\u2019t allowing highly indebted households to walk away from their obligations. This is for the Australian Prudential Regulation Authority, the federal, state and territory governments and individual commercial banks.<\/p>\n
In July, Treasurer Jim Chalmers asked three eminent independent professionals in Carolyn A. Wilkins, Professor Ren\u00e9e Fry McKibbin and Dr Gordon de Brouwer to cast a critical eye over many aspects of the RBA. They will complete this important review early next year.<\/p>\n
It\u2019s not a witch-hunt and I would be surprised if it results in a fundamental change in what central banking is in Australia or how it is done. But given the last review was more than 40 years ago, it\u2019s an ideal opportunity to do some housekeeping.<\/p>\n
When the Reserve Bank Act was legislated in 1959, there was no internet. Now, endless powerful platforms and information sources can, and should be, used to help the RBA help all of us understand what they are doing and why.<\/p>\n
They would augment the excellent speeches given by senior RBA officials, thorough research and the statements and minutes that accompany monthly board meetings.<\/p>\n
For those who communicate RBA actions to clients and the public, such as financial journalists and market and commercial economists such as me, in columns like this, there should be full transparency. That is, access to the people, data, charts and calculations that feed into official publications that provide opportunities for discussion, comment and explanation.<\/p>\n
Monetary policy setting is a delicate exercise but done with a blunt tool. The RBA cannot be all things to all people. So let\u2019s give it the room it needs to be unpopular when it needs to be. And let\u2019s change the legislated objectives in the Reserve Bank Act to make them more meaningful.<\/p>\n
If the Reserve Bank is successful in delivering inflation of between 2 and 3 per cent, it\u2019s much easier to keep it low and stable. Managing expectations of what inflation should be is a very powerful way of ensuring that it behaves. The Reserve Bank governor shouldn\u2019t have to make promises of keeping rates low or apologise for causing stress to those that take on a lot of debt.<\/p>\n
It would require a few marble tiles to be replaced in the Reserve Bank\u2019s foyer, but that\u2019s a small price to pay.<\/p>\n
Cherelle Murphy is chief economist EY Oceania<\/b><\/p>\n
The Opinion newsletter is a weekly wrap of views that will challenge, champion and inform your own. <\/i><\/b>Sign up here<\/i><\/b>.<\/i><\/b><\/p>\nMost Viewed in Business<\/h2>\nFrom our partners<\/h3>\n
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