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Economics—House of Representatives Standing Committee—Uncharted territory: Review of the Reserve Bank of Australia annual reports 2019 and 2020—Report
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PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
Uncharted Territory: Review of the Reserve Bank of Australia Annual Reports 2019 and 2020
House of Representatives Standing Committee on Economics
© Commonwealth of Australia
ISBN 978-1-76092-409-6 (Printed Version)
ISBN 978-1-76092-410-2 (HTML Version)
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Chair's Foreword
Over the last two years, all facets of Australian life have been overshadowed by the COVID-19 pandemic. Australian governments responded to the public health emergency by implementing widescale lockdowns, introducing social distancing measures, and closing borders. These measures were, for the most part, necessary and saved innumerable lives. At the same time, the public health response also precipitated the most serious economic crisis Australia has faced in recent history and saw it enter recession for the first time in nearly 30 years.
The Commonwealth Government reacted to the economic crisis with massive fiscal stimulus, amounting to seven or eight per cent of Gross Domestic Product (GDP), with state and territory governments adding another two per cent to this. This stimulus was instrumental in ensuring that Australians, whose livelihoods were imperilled by the crisis, could pay their mortgages and utility bills and feed their families. Crucially, the Government’s JobKeeper program allowed businesses to keep employees on their payrolls, enabling a smooth return to work once lockdowns were lifted and businesses re-opened.
In conjunction with the federal and state and territory government fiscal stimulus packages, the Reserve Bank of Australia (RBA) responded to the COVID-19 emergency with unprecedented monetary policy measures. In March 2020 the RBA dropped the already historically low cash rate to 0.25 per cent, and in November 2020 again to 0.1 per cent. Also in March 2020, the RBA announced a 0.25 per cent target for the yield on 3-year Australian Government bonds, which was also reduced in November 2020 to 0.1 per cent, and commenced a Government Bond Purchase Program aimed at lowering the costs of lending across the economy. Complementing these measures, in March 2020 the RBA also instituted a Term Funding Facility scheme to provide cheap credit to the banking system to enable it to support small and medium-sized enterprises with the provision of low-interest business loans.
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On the back of these coordinated fiscal and monetary policy responses, the Australian economy has rebounded strongly. The economy is back to positive growth, and we are experiencing the lowest rates of unemployment since before the Global Financial Crisis in 2008, with the latest unemployment figure at 4 per cent. The underemployment rate has also seen a gradual decline since the height of the pandemic in 2020, now down to 6.6 per cent. While wage growth remains subdued, the tightening of the labour market is expected to see gradual upwards pressure on wages in coming years.
While the solid recovery of the Australian economy is a cause for optimism, significant threats to our economic prosperity remain. The Russian invasion of Ukraine in February 2022 is not only a threat to the rules-based international order, it also poses significant economic challenges for the global economy, Australia included. We have already seen massive increases in the price of fuel as a direct consequence of Russia’s aggression and we can anticipate more generalised price rises ahead.
The extent and severity of these prices rises for Australia, however, remains uncertain. While inflation continues to be muted across Asia and underlying inflation in Australia has just reached the mid-point of the RBA inflation target for the first time in seven years, the US is currently seeing inflation at a 40-year high and the Federal Reserve has recently raised the cash rate in an attempt to take some of the heat out of the US economy. The UK and Europe are facing similar inflationary situations. All of this intensified by war in Ukraine.
Keeping inflation on consumer goods in check while maintaining the buoyancy of the Australian economy will be a central challenge for the RBA in the coming months and years. And this committee will continue to be right there, assessing the Bank’s performance in maintaining this precarious balancing act and the appropriateness of the Bank’s inflation target over the medium term of between two and three per cent.
Australian house prices, meanwhile, remain at all-time highs, with residential property prices rising by 23.7 per cent over the past 12 months. This rise has largely been pushed by over-regulation and inflexible zoning requirements that have stunted housing supply. Inaction by governments on regulatory reform to increase the supply of housing has effectively priced young Australians out of the housing market and will result in an increase in inter-generational inequality. Record house prices mean that Australians have had to borrow more and more to achieve the Australian dream of home ownership. While interest rates are at all-time lows, increasing inflation may see the RBA raise the cash rate sometime this year. Any increase in the cash rate could place many people, already burdened
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with debts many times their annual salaries, into financial hardship as they see their mortgage repayments increase significantly. The committee will continue to scrutinise closely the full impact of RBA decisions on the Australian people.
Growth in the global economy will be propelled, more than ever before, by technological innovation. Often, the regulatory framework lags behind changes pushed by technology, such as that relating to digital wallets and the domination of that sector by companies such as Apple. It is crucial, therefore, that regulation in this country keeps pace with technological change and remains fit-for-purpose, promoting competition and the interests of Australian consumers. While the rising importance of digital currencies is another area of technological innovation that the RBA must keep abreast of to ensure the best outcomes for the health of our economy.
The monetary policy response of the Reserve Bank to the current uncertainties the nation faces will remain critical for the resilience of the Australian economy. Given the magnitude of the RBA’s potential impact on the Australian economy and, by extension, the well-being of our population, demanding transparency from the RBA in its decision-making continues to be of vital public interest. The committee will continue to play its role in holding the Bank to account before the Australian parliament and people.
Mr Jason Falinski MP
Chair
March 2022
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Contents
Chair's Foreword .............................................................................................................................. iii
Members ............................................................................................................................................ ix
Terms of Reference ........................................................................................................................... xi
Abbreviations .................................................................................................................................. xiii
The Report
1 Introduction .............................................................................................................. 1
2 Monetary Policy in Response to the COVID-19 Pandemic ............................. 5
3 Broader Economic Conditions and Other Issues ............................................. 17
Appendix A. Hearings, briefings and witnesses ........................................................ 39
Appendix B. Seventh Statement on the Conduct of Monetary Policy.................... 41
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Members
Chair
Mr Jason Falinski MP (from 25 October 2021) Mackellar, NSW
Mr Tim Wilson MP (until 8 October 2021) Goldstein, VIC
Deputy Chair
Hon Dr Andrew Leigh MP Fenner, ACT
Members
Mr Adam Bandt MP Melbourne, VIC
Mr Jason Falinski MP (until 25 October 2021) Mackellar, NSW
Mr Garth Hamilton MP (from 25 October 2021) Groom, QLD
Ms Celia Hammond MP Curtin, WA
Mr Andrew Laming MP Bowman, QLD
Hon Michael McCormack MP (from 11 March 2022) Riverina, NSW
Dr Daniel Mulino MP Fraser, VIC
Ms Peta Murphy MP Dunkley, VIC
Mr Julian Simmonds MP Ryan, QLD
x
Committee Secretariat
Secretary Lachlan Wilson
Inquiry Secretary Danton Leary
Senior Researcher Jenny Luu
Office Manager Jazmine Rakic
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Terms of Reference
The House of Representatives Standing Committee on Economics is empowered to inquire into, and report on, the annual reports of government departments and authorities tabled in the House that stand referred to the committee for any inquiry the committee may wish to make. The reports stand referred in accordance with the schedule tabled by the Speaker to record the areas of responsibility of the committee.
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Abbreviations
ABS Australian Bureau of Statistics
ADI Authorised deposit-taking institutions
CPI Consumer Price Index
COVID-19 Coronavirus Disease 2019
ECB European Central Bank
ES Exchange Settlement
GDP Gross Domestic Product
OECD Organisation for Economic Co-operation and Development
PA Personal assistant
RBA Reserve Bank of Australia
SME Small and Medium Enterprise
TFF Term Funding Facility
WPI Wage Price Index
1
1. Introduction
Background
1.1 The House of Representatives Standing Committee on Economics (the committee) is responsible for scrutinising the Reserve Bank of Australia (RBA) and for ensuring its transparency and accountability to the Parliament, the community, and the financial sector.
1.2 Biannual appearances by the RBA Governor and senior RBA staff before the committee are important mechanisms within the RBA’s accountability framework. This framework was first established in the 1996 Statement on the Conduct of Monetary Policy, agreed between the then Treasurer, the Hon Peter Costello MP and then Governor of the RBA, Mr Ian Macfarlane, which clarified the relationship between the Government and the RBA and ‘provided for increased accountability through half-yearly reports on monetary policy and appearances by the Governor before a Parliamentary committee.’1 This approach has been reiterated in subsequent statements on the conduct of monetary policy, with the latest noting:
…the Governor will continue to be available to report twice a year to the House of Representatives Standing Committee on Economics, and to other Parliamentary committees as appropriate.
1 Reserve Bank of Australia (RBA), ‘Reserve Bank of Australia Report and Financial Statement’, 30
June 1997, p. 8. Available at:
2 UNCHARTED TERRITORY: REVIEW OF THE RESERVE BANK OF AUSTRALIA ANNUAL REPORTS 2019 AND 2020
The Treasurer expresses support for the continuation of these arrangements, which reflect international best practice and enhance the public's confidence in the independence and integrity of the monetary policy process. 2
1.3 The Governor’s appearances before the committee occur within the context of the committee’s ongoing reviews of the annual reports of the RBA, which also provide an important mechanism for promoting the transparency and accountability of the RBA. The Standing Orders of the House of Representatives provide for the referral of the annual reports of government departments and authorities tabled in the House to committees in accordance with the Speaker’s Schedule.3
1.4 The RBA’s annual reports stand referred to the committee under this Schedule. The committee resolved to conduct an inquiry into the RBA’s 2019 Annual Report on 10 December 2019 and resolved to extend that inquiry to cover the RBA’s 2020 Annual Report on 23 June 2021.4
Scope of the Review
1.5 The RBA appeared before the committee on five occasions during the period covered by the current report: 14 August 2020, 2 December 2020, 5 February 2021, 6 August 2021, and 11 February 2022. The hearings were broadcast over the internet through the Parliament’s website, allowing interested parties the opportunity to listen to proceedings. The transcripts of these hearings are available on the committee’s website.5
1.6 The RBA had previously appeared before the committee on 7 February 2019 as part of the committee’s review of the RBA’s 2019 annual report. The Committee’s findings related to this hearing were tabled in March 2020 in
2 The Treasurer and the Governor of the Reserve Bank of Australia, ‘Statement on the Conduct of
Monetary Policy’, 19 September 2016,
3 Standing Order 215(c). The Speaker’s Schedule is available at:
4 The 2019 RBA annual report is available at:
5 House of Representatives Standing Committee on Economics, Review of the Reserve Bank of Australia
Annual Report 2019 (First Report), March 2020, available at:
INTRODUCTION 3
the committee’s Review of the Reserve Bank of Australia Annual Report 2019 (First Report).6
1.7 A list of RBA representatives who appeared before the committee at the public hearings can be found at Appendix A. The RBA’s responses to questions taken on notice during the hearings and questions in writing received following the hearings are available on the Committee’s website.7
1.8 In the lead up to the public hearings, the committee received private briefings from prominent economists—Ms Joanne Masters, Mr Saul Eslake, Ms Catherine Birch, Mr Richard Yetsenga and Mr Stephen Walker. These briefings provided valuable background information and expert insight for the committee, aiding it in its discussions with the RBA at the public hearings. The committee extends its thanks to Ms Masters, Mr Eslake, Ms Birch, Mr Yetsenga and Mr Walker for their cooperation and assistance.
1.9 As well as being crucial forums to enhance the accountability and transparency of the RBA, the public hearings continue to bring issues of monetary policy and Australia’s macroeconomic performance to the forefront of public debate. These hearings are also important means for financial markets to be better informed on the current thinking of the RBA.
1.10 This report highlights the central matters raised during the public hearings and draws out issues raised in the RBA’s recent statements on monetary policy and its annual reports. These statements and the annual reports can be viewed on the RBA’s website.8
1.11 The COVID-19 pandemic and associated lockdowns have been the defining factor in Australia’s economic performance over the last two years. The RBA’s monetary policy response to this and Australia’s broader economic trajectory on its way to recovery form the core focus areas of this report.
6 Available at:
7 Available at:
8 Statements on monetary policy are available at:
viewed 3 March 2022. RBA annual reports are available at:
5
2. Monetary Policy in Response to the COVID-19 Pandemic
Background
2.1 At the onset of the COVID-19 pandemic and related health measures in 2020, the Reserve Bank of Australia (RBA) introduced a range of monetary policy measures to ensure funding costs remained low and credit remained available.
2.2 These measures included:
ï§ reducing the cash rate in March 2020 to 0.25 and to 0.1 per cent in November 2020; ï§ the introduction of a target on the 3-year Australian Government bond yield of around 25 basis points; ï§ the introduction of a Government Bond Purchase Program focusing on
the 5-to-10-year segment of the yield curve; ï§ providing a three-year Term Funding Facility (TFF) for banks and other authorised deposit-taking institutions; and ï§ reducing the interest rate paid on Exchange Settlement (ES) balances
(the balances the banking system holds with the RBA) to 10 basis points.1
2.3 In assessing the broad macroeconomic picture, the RBA Governor (the Governor) explained that fiscal policy ‘has provided much of the support to the Australian economy’ and that this shift to using fiscal policy has been ‘a
1 The Reserve Bank of Australia (RBA), ‘Supporting the Economy and Financial System in Response
to COVID-19’,
6 UNCHARTED TERRITORY: REVIEW OF THE RESERVE BANK OF AUSTRALIA ANNUAL REPORTS 2019 AND 2020
shock for a country that's got used to low budget deficits and low levels of public debt.’ However, the Governor - while painstakingly pointing out that fiscal policy is a matter for the government - provided four reasons behind this fiscal policy response:
ï§ borrowing today to support the economy avoids ‘an even bigger loss of output and jobs’; ï§ Australia's public finances are in strong shape, and public debt ‘is much lower than in most other countries’; ï§ the national balance sheet is ‘in a strong position after decades of good
economic performance’; and ï§ the Federal Government’s financing costs ‘have never been lower, with interest rates being the lowest since Federation’.2
2.4 Since 2020, new COVID strains continue to affect economies and markets around the globe. However, considering the faster-than-expected recovery of the Australian economy, the RBA made decisions to unwind some of its policy responses to the pandemic:
ï§ On 3 November 2020, the interest rate on the TFF was reduced from 0.25 per cent to 0.1 per cent. Then, on 30 June 2021, the TFF closed to new drawdowns as scheduled. ï§ On 1 February 2022, the RBA announced that bond purchases would
cease after 10 February, and that it will maintain the cash rate target at 10 basis points and the interest rate on Exchange Settlement balances at zero per cent.3
2.5 The RBA recently stated that it is too early to conclude that inflation is sustainably in the target range, highlighting that underlying inflation has only just reached the midpoint of the target range for the first time in over seven years.4
2.6 Through the public hearing process, the committee closely examined the decisions of the RBA in the context of Australia’s broader macroeconomic conditions and assessed the RBA’s confidence in current monetary policy settings to support the Australian economy through a period of extraordinary uncertainty and unprecedented but necessary levels of pandemic-related deficit spending.
2 Mr Philip Lowe, Governor, RBA, Committee Hansard, 14 August 2020, p. 4.
3 RBA, ‘Supporting the Economy and Financial System in Response to COVID-19’,
4 Mr Philip Lowe, Governor, RBA, Committee Hansard, 11 February 2022, p. 3.
MONETARY POLICY IN RESPONSE TO THE COVID-19 PANDEMIC 7
Cash Rate
2.7 To boost the cash flow of businesses and the household sector and help Australia’s trade-exposed industries through the exchange rate, the RBA Board reduced the cash rate to 0.5 per cent on 3 March 2020, to 0.25 per cent on 18 March 2020, and to 0.1 per cent on 3 November 2020.
2.8 At the public hearing on 14 August 2020, the Governor told the Committee that the Board will not increase the cash rate until progress has been made towards full employment and it is confident that inflation will be sustainably within the two to three per cent target range.5
2.9 The RBA acknowledged that low interest rates do have negative consequences for some people, particularly those relying on interest income. However, the RBA added that lower interest rates do benefit the community as a whole.6
2.10 At the public hearing on 5 February 2021, the RBA was asked to clarify what it meant by ‘sustainably’ within the target range, to which the Governor responded that:
… we’ll see inflation at three per cent probably in six months time. That will be one quarter, so obviously that’s not ‘sustainably’. It really depends, as you are suggesting, on what’s going on in the economy. I’m expecting we’ll want to see inflation between two and three per cent for a few quarters and then there will be strong prospects that it’s going to stay there, and that will depend on what else is going on in the economy at the time. 7
2.11 More recently, as Australia experienced higher-than-expected inflation, the RBA told the committee at the public hearing on 11 February 2022 that it is too early to conclude that inflation is sustainably in the target range because in underlying terms, inflation has just reached the midpoint of the target band. The RBA also highlighted that this has come on the back of large disruptions to supply chains and distribution networks, with effects expected to only be temporary, and at a time when aggregate wage growth is no higher than it was before the pandemic.8
5 Mr Philip Lowe, Governor, RBA, Committee Hansard, 14 August 2020, p. 3.
6 RBA, ‘Supporting the Economy and Financial System in Response to COVID-19’,
7 Mr Philip Lowe, Governor, RBA, Committee Hansard, 5 February 2021, p. 11.
8 Mr Philip Lowe, Governor, RBA, Committee Hansard, 11 February 2022, p. 3.
8 UNCHARTED TERRITORY: REVIEW OF THE RESERVE BANK OF AUSTRALIA ANNUAL REPORTS 2019 AND 2020
2.12 Because of these circumstances, the RBA told the committee it is prepared to be patient and has ‘scope to wait and see how the data develop and how some of the uncertainties are resolved. Countries with higher rates of inflation have less scope to wait here’.9
2.13 At the public hearing on 11 February 2022, the committee also asked the RBA what it thinks is the neutral cash rate, given the record high level of household debt. The Governor responded that:
I really hope that the equilibrium real interest rate, in those analytical terms, is positive. It’s going to deliver you an average rate of inflation of 2½, so if the real rate was zero that would be the cash rate of 2½. And we don’t know, but let’s hope productivity growth will be stronger and the return to savers will be positive in real terms. We don’t know. I’m hopeful, but we haven’t made up our minds on that. We’ll have to look at the evidence both here and globally. 10
2.14 When asked whether it could have handled communication around cash rate increases better, the RBA stated that it seeks to first, provide people with its forecasts for economic activity and inflation in the labour market and second, provide details of its reaction function - the factors that it takes into account when making decisions. The third thing it does is draw from the implications of those two things for the timing of interest rate changes.11
2.15 In addition, the Governor stated that:
We have to provide people with forecasts and details of our reaction function. Whether it was wise to draw the implications of that for the timing of the increase in the cash rate I’ll let others judge but, from my perspective, the benefit of that is that it made it very clear to the community that the Reserve Bank was going to provide the support the economy needed …. As things have turned out better than expected, our forecasts have been revised up and, given our reaction function, that has changed the timing of the likely first increase in the cash rate.12
Bond Yield Target
2.16 To help lower funding costs across the economy, on 19 March 2020, the RBA Board announced a 0.25 per cent target for the yield on 3-year Australian Government bonds. This target was then reduced to 0.1 per cent on 3
9 Mr Philip Lowe, Governor, RBA, Committee Hansard, 11 February 2022, p. 3.
10 Mr Philip Lowe, Governor, RBA, Committee Hansard, 11 February 2022, p. 4.
11 Mr Philip Lowe, Governor, RBA, Committee Hansard, 11 February 2022, p. 5.
12 Mr Philip Lowe, Governor, RBA, Committee Hansard, 11 February 2022, p. 5.
MONETARY POLICY IN RESPONSE TO THE COVID-19 PANDEMIC 9
November 2020. The target was supported by RBA purchases of government bonds.
2.17 When asked whether the RBA would consider extending the yield curve control to a longer maturity, for example a five-year yield, the Governor stated that the Board chose a three-year bond rate as it ‘influences corporate and bank borrowing rates… by lowering the three-year bond rate, we lower the funding costs right across the country.’ The Governor added that he does not feel confident that ‘the cash rate is going to be where it is for five years’ and felt more assured to ‘start with the three and see where that goes and how the economy progresses’.13
2.18 The committee asked whether an extension of the yield curve control would assist in moving inflation into the target band. The Governor stated that he is not confident that the RBA ‘would get much more traction at the moment from having the five-year yield curve at 10 or 15 basis points lower than where it currently is’ and added that if the RBA is going to have a target for a five-year yield, ‘it needs to be consistent with our expectations for the cash rate’.14
2.19 On 6 July 2021, the Board announced that the yield target would continue to apply to the then-current 3-year Australian Government bond—the April 2024 bond—rather than roll to a later-maturity bond, and on 2 November 2021, the Board announced that the target on the April 2024 bond had been discontinued.15
2.20 The committee asked why the RBA did not hold a board meeting when it decided to abandon the yield curve control, to which the Governor responded:
The sequence of events was that the CPI [Consumer Price Index] came out on the Wednesday before the board meeting on the following Tuesday. It came out and it was considerably higher than we had expected, and that followed a stronger labour market than we expected. We then spent some time reassessing the outlook of that for our forecasts and, on the subsequent day, the Thursday, we did contemplate the possibility of having a board meeting— I did think about it on the Friday—but the board was meeting just two days later on the Tuesday morning. We thought by the time we went through the
13 Mr Philip Lowe, Governor, RBA, Committee Hansard, 14 August 2020, p. 11.
14 Mr Philip Lowe, Governor, RBA, Committee Hansard, 14 August 2020. p. 11.
15 RBA, ‘Supporting the Economy and Financial System in Response to COVID-19’,
10 UNCHARTED TERRITORY: REVIEW OF THE RESERVE BANK OF AUSTRALIA ANNUAL REPORTS 2019 AND 2020
process of setting up the board meeting and establishing the various considerations—we'd want it to be fully balanced—that we could wait until the Tuesday. In any case, if the board at that meeting on Tuesday had decided they wanted to defend the target, we would have gone in and bought the bonds again, and done our best to get the yield back to the target16.
Government Bond Purchase Program
2.21 The Government Bond Purchase Program was introduced to help lower the whole structure of interest rates in Australia and to support the economy through the normal transmission of monetary policy.17
2.22 On 3 November 2020, the RBA announced that it would purchase bonds issued by both the Australian Government and by the state and territory governments in the secondary market under a $100 billion bond purchase program.18
2.23 The committee was interested in the state and territory government bonds purchasing program which was designed to ease financial constraints on state and territory budgets under pressure from falling GST, property and payroll tax revenues, and from high infrastructure borrowing.
2.24 When asked why the RBA had purchased a smaller share of state bonds in New South Wales and Victoria than their proportionate share of the population, the RBA explained that the aim of the program ‘was to counter the bond market dysfunction… in both the federal government and the semi-government markets… rather than fund the states in particular.’ The RBA added that:
What made sense for us is to calibrate it according to the stock of bonds outstanding as the more relevant metric. Certainly, investors typically don't hold bonds in proportion to something like gross state product; they're more likely to follow something which is weighted according to the outstanding stock of bonds. The shares that we ended up allocating to the different states—
16 Mr Philip Lowe, Governor, RBA, Committee Hansard, 11 February 2022, p. 21.
17 RBA, ‘Supporting the Economy and Financial System in Response to COVID-19’,
18 RBA, ‘Supporting the Economy and Financial System in Response to COVID-19’,
MONETARY POLICY IN RESPONSE TO THE COVID-19 PANDEMIC 11
New South Wales and Victoria, with around 45 per cent of our buying program—were in accordance with the value of bonds outstanding... 19
2.25 In August 2020, the committee noted that the RBA was carrying around $50 billion of various government debts and could potentially agree to write off that debt to help the government through the COVID-19 period. The committee suggested that if the RBA insists on the government repaying its debts, it will have to borrow more and the RBA will have to purchase more bonds to meet the yield target.
2.26 The Governor explained that if the RBA tells the government not to pay the bonds back, ‘the central bank balance sheet is then hugely in negative territory… And, if you continue to do that, the central bank balance sheet would go more and more into negative equity, which would be very problematic in the end. It could destroy confidence in the country, and institutional arrangements would come under question’. The Governor added that ‘the right way to do this is for the government to borrow—at the lowest interest rate since Federation. The borrowing costs are not a constraint on government at the moment’.20
2.27 When questioned whether the RBA had considered providing zero per cent interest loans to the government, the Governor stated that this does not ultimately lower the total cost of finance and ‘it can delay the time when the government ultimately pays for the cost of financing. It's certainly possible to do that and, in some circumstances, it could be warranted to do that. But they're not the circumstances that Australia faces’. The Governor explained that loans with a zero per cent interest rate mean that ‘the central bank has an asset that’s earning no money, and then, over time, there will be lower profits at the central bank and lower distributions to government, and there will have to be a tax compensation for that’.21
2.28 On 2 February 2021, the RBA announced that it would purchase an additional $100 billion of government bonds following completion of the initial bond program in April 2021.22
19 Dr Christopher Kent, Assistant Governor (Financial Markets), RBA, Committee Hansard, 14 August
2020, p. 11. 20 Mr Philip Lowe, Governor, RBA, Committee Hansard, 14 August 2020, p. 22.
21 Mr Philip Lowe, Governor, RBA, Committee Hansard, 14 August 2020, p. 22.
22 RBA, ‘Supporting the Economy and Financial System in Response to COVID-19’,
12 UNCHARTED TERRITORY: REVIEW OF THE RESERVE BANK OF AUSTRALIA ANNUAL REPORTS 2019 AND 2020
2.29 The RBA told the committee that it estimated its bond purchases had lowered yields on longer-term Australian Government bonds by around 30 basis points and also contributed to lower spreads on the bonds issued by the states and territories, while adding liquidity to the Australian financial system.23
2.30 On 6 July 2021, the RBA announced that it would continue purchases of government bonds following completion of the second $100 billion of bond purchases in early September 2021, at a rate of $4 billion per week until at least mid-November.24
2.31 On 1 February 2022, the RBA announced that bond purchases would cease after 10 February.
The decision to implement a bond buying program followed a careful review of international experience. Because other central banks have bought government bonds under quantitative easing programs, they have pushed down the yields on their bonds, which in turn, has put downward pressure on the value of their currencies.25
2.32 The Governor told the committee that ultimately, across all the various programs, the RBA has purchased $350 billion of bonds issued by the Australian Government and by the state and territory governments. These purchases have lowered funding costs, supported asset prices, and led to a lower exchange rate.26
Term Funding Facility (TFF)
2.33 On 18 March 2020, the RBA announced a Term Funding Facility (TFF) scheme for the banking system. This scheme would complement the target for the three-year bond yield and provide an incentive for lenders to support credit to businesses, especially small and medium-sized businesses.27
2.34 Under the scheme, the RBA provided a three-year funding facility to authorised deposit-taking institutions (ADIs) at a fixed rate of 0.25 per cent,
23 Mr Philip Lowe, Governor, RBA, Committee Hansard, 5 February 2021, p. 3.
24 RBA, ‘Supporting the Economy and Financial System in Response to COVID-19’,
25 Mr Philip Lowe, Governor, RBA, Committee Hansard, 2 December 2020, p. 3.
26 Mr Philip Lowe, Governor, RBA, Committee Hansard, 11 February 2022, p. 3.
27 RBA, Minutes of the Monetary Policy Meeting of the Reserve Bank Board, 18 March 2020,
MONETARY POLICY IN RESPONSE TO THE COVID-19 PANDEMIC 13
which was substantially below lenders’ funding costs. ADIs could obtain initial funding of up to 3 per cent of their existing outstanding credit until the end of September 2020 and could access additional funding if they increased lending to businesses, especially small and medium-sized businesses, until the end of March 2021.28
2.35 On 1 September 2020, the RBA reviewed the operation of the TFF and ‘agreed that the TFF had worked as intended and, given the economic outlook, an expansion of the TFF was appropriate’. The RBA increased the size of the TFF to approximately $200 billion. ADIs could now access additional funding, equivalent to 2 per cent of their outstanding credit, at a fixed rate of 25 basis points for three years until the end of June 2021.29
2.36 As at 3 November 2020, ADIs had drawn down $83 billion of low-cost funding through the TFF and had access to a further $104 billion under the facility.30
2.37 From 3 November 2020, the RBA expanded the scheme further, with the introduction of additional and supplementary allowances. This reduced the interest rate on new drawdowns under the TFF to 0.1 per cent per annum, which could be accessed until 30 June 2021. The interest rate on existing drawdowns under the initial allowance, which closed to new drawdowns on 30 September, remained at the 0.25 per cent rate.31
2.38 At the public hearing on 2 December 2020, the RBA was asked to give data on which institutions have been using the facility and how much those institutions have used of their allocations. The RBA responded in writing, outlining that as at December 2020, the total funding allowance under the TFF was around $190 billion, compared with $150 billion in August 2020 and $90 billion at the program’s inception.32
28 RBA, Minutes of the Monetary Policy Meeting of the Reserve Bank Board, 18 March 2020,
29 RBA, Minutes of the Monetary Policy Meeting of the Reserve Bank Board, 1 September 2020,
Economy’,
14 UNCHARTED TERRITORY: REVIEW OF THE RESERVE BANK OF AUSTRALIA ANNUAL REPORTS 2019 AND 2020
2.39 Almost all of the funding available under the $84 billion TFF initial allowance was drawn down - the large Australian banks, mid-sized Australian banks and smaller ADIs drew down close to all of their initial allowances, with branches and subsidiaries of foreign banks using nearly three-quarters of their allowances.33
2.40 On 4 May 2021, the RBA Board confirmed that it was not considering a further extension of the TFF.34
Interest Rate for Exchange Settlement Balances
2.41 On 18 March 2020, the RBA announced that Exchange Settlement (ES) balances would be remunerated at 10 basis points, rather than zero. It explained that this would alleviate the cost to the banking system that, under the existing system, would eventuate from reducing the cash rate to 0.25 per cent.35
2.42 Under the existing system, balances which financial institutions hold with the RBA earn an interest rate 25 basis points below the cash rate. With the cash rate set at 0.25 per cent, the interest rate on ES balances would be zero. The RBA explained that:
In view of the significant increase in the balances held in ES accounts resulting from the combined effect of the Bank's enhanced liquidity operations, bond purchases and the term funding program, maintaining a zero interest rate on these balances would increase the costs to the banking system. Members agreed that such an outcome would be undesirable in the current environment. They endorsed the proposal to alleviate this cost by increasing the rate of interest on settlement balances to 10 basis points. 36
33 RBA, Response to question on notice, RBA10QON.
34 RBA, ‘Term Funding Facility - Reduction in Interest Rate to Further Support the Australian
Economy’,
35 RBA, Minutes of the Monetary Policy Meeting of the Reserve Bank Board, 18 March 2020,
MONETARY POLICY IN RESPONSE TO THE COVID-19 PANDEMIC 15
2.43 On 3 November 2020, the RBA announced a further reduction in the cash rate to 0.1 per cent and a reduction in the interest rate on exchange settlement balances held by financial institutions at the RBA to zero.37
37 RBA, Minutes of the Monetary Policy Meeting of the Reserve Bank Board, 3 November 2020,
17
3. Broader Economic Conditions and Other Issues
Australia’s Economic Recovery
3.1 The impact of the COVID-19 pandemic and associated public health measures on the Australian economy has been profound. The public health response to the crisis caused the largest economic contraction to the global economy since the Great Depression in the 1930s and saw Australia enter recession for the first time in nearly three decades, with Gross Domestic Product (GDP) falling by 7 per cent in the June quarter of 2020 and unemployment peaking at 7.5 per cent in August 2020, the highest rate in over 20 years.1
3.2 In August 2020, the Reserve Bank of Australia (RBA) Governor (the Governor) explained to the committee that, despite its magnitude, the economic contraction had not been as severe as had been predicted:
If there is any good news at all to be found here, it is that this decline is not as large as we initially feared; it's also not as large as what we're seeing in many other countries at the moment. Similarly, while the labour market outcomes have been very poor, they have not been as bad as was expected. Hours worked were initially expected to fall by a staggering 20 per cent over the first half of this year. The actual fall has only been around half of this, largely due
1 Australian Bureau of Statistics (ABS), ‘One year of COVID-19: Aussie jobs, business and the
economy’,
18 UNCHARTED TERRITORY: REVIEW OF THE RESERVE BANK OF AUSTRALIA ANNUAL REPORTS 2019 AND 2020
to Australia's initial success in containing the virus and the earlier than expected easing of some of the restrictions.2
3.3 Despite the positive outlook, the Governor cautioned that the road to recovery for Australia would be ‘uneven and bumpy’ and ‘more drawn out than was initially expected’.3 When asked about the best policy settings to ensure as swift a recovery as possible, the Governor responded that:
From our perspective, it's keeping interest rates low and the supply of credit available to the economy. From a government perspective, at a very high level, there have been two approaches. The first was to build the bridge to get us over the pandemic, and, by and large, governments around Australia have done that quite successfully. The second element of that is to build the road to the recovery…. The first step was to build the bridge. We're coming down the other side of that. We're ramping off the bridge now, and now it's building the road to recovery. There are a whole bunch of structural reforms. The government is focused on training. It's focused on the digital economy. There's a process for industrial relations reform. These are the types of things we need to focus on to make sure that road to recovery is a strong one. 4
3.4 According to the Governor, the central factor in accounting for the better-than-expected economic outcome for Australia has been the coordinated economic policy response by federal and state and territory political leaders, regulators, the banking sector, and the RBA. On this, the Governor commented:
That common mission was to support the Australian economy through this difficult period. The level of cooperation and coordination was extraordinary, and it was a real ‘Team Australia’ mindset. In my view, this reflects positively on both Australia’s political system and our institutions, and we shouldn’t forget that. 5
3.5 On the economic policy response, the Governor noted that ‘[w]hile monetary policy has played an important role, it’s been fiscal policy that has provided much of the support to the Australian economy’. This fiscal response has been to an unprecedented level, with spending by the Commonwealth Government amounting to seven or eight per cent of GDP and that of the
2 Mr Philip Lowe, Governor, Reserve Bank of Australia (RBA), Committee Hansard, 6 August 2020, p. 2.
3 Mr Philip Lowe, Governor, RBA, Committee Hansard, 6 August 2020, p. 2. Also see: Committee
Hansard, 2 December 2020, p. 2.
4 Mr Philip Lowe, Governor, RBA, Committee Hansard, 2 December 2020, p. 6.
5 Mr Philip Lowe, Governor, RBA, Committee Hansard, 6 August 2020, p. 3.
BROADER ECONOMIC CONDITIONS AND OTHER ISSUES 19
states and territories around two per cent.6 This fiscal stimulus, including the Commonwealth Government’s JobKeeper payment scheme, the HomeBuilder grant scheme and the SME (Small and Medium Enterprises) Recovery Loan Scheme7, has supported individuals and businesses through the COVID-19 crisis and has provided a solid basis for Australia’s economic recovery.
3.6 The Governor mentioned that the unprecedented levels of fiscal stimulus by government contrasted with the approach of decades past, which were characterised by low budget deficits and low levels of public debt. On the current high levels of debt, however, the Governor noted that it was ‘entirely manageable and it’s affordable’.8
3.7 The committee asked how the COVID-19 recession differed from previous economic downturns. The Governor explained that previous recessions have been caused by macroeconomic policy mistakes, problems in the financial system or global economic shocks, and have tended to have more uniform negative effects across the whole economy and society. By contrast, the impacts of the COVID-19 recession have been very uneven with certain locations, industry sectors, and age cohorts hit harder than others. The Governor suggested that:
As we come out of this, it will be an issue for governments around the country as to whether they try and offset those differential effects with industry or regional specific policies. That's something we'll have to confront going forward.9
3.8 Reflecting on the experience of the Australian economy over the pandemic period, the Governor suggested that ‘the economy has proven to be resilient’. He suggested that despite the disruptions caused by the Omicron strain, ‘we still expect growth in GDP in the March quarter, with spending and hours worked already recovering quite quickly.’10
3.9 The Governor provided the following outlook for the Australian economy:
6 Mr Philip Lowe, Governor, RBA, Committee Hansard, 6 August 2020, pp. 4, 5.
7 Australian Government, ‘Economic Response to COVID-19’, < https://treasury.gov.au/coronavirus>,
viewed 8 March 2022.
8 Mr Philip Lowe, Governor, RBA, Committee Hansard, 6 August 2020, p. 4.
9 Mr Philip Lowe, Governor, RBA, Committee Hansard, 6 August 2020, p. 16.
10 Mr Philip Lowe, Governor, RBA, Committee Hansard, 11 February 2022, p. 1.
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Reflecting this resilience, the outlook for the Australian economy has improved since we last met in August. We estimate that GDP increased by around five per cent over 2021 and we're expecting GDP growth of around 4¼ per cent this year and two per cent next year. This outlook is being underpinned by a number of factors. These include household balance sheets that are in generally good shape, with households having accumulated more than $200 billion in additional savings over the past two years. That's a lot of extra money they have in their bank accounts. An upswing in business investments is also underway. There's a large pipeline of residential building to be completed over the next or so. Macroeconomic policy settings are also supportive of growth, with governments planning significant infrastructure spending and monetary policy remaining very accommodating. 11
Inflation and the RBA Inflation Target
3.10 The Reserve Bank Act 1959 outlines three broad objectives for the RBA Board in deploying monetary policy:
ï§ The stability of the currency of Australia. ï§ The maintenance of full employment in Australia. ï§ The economic prosperity and welfare of the people of Australia.12
3.11 Since the early 1990s, the RBA has maintained a target for consumer price inflation of between two and three per cent as a means for achieving these broad mandates. The target is ‘defined as a medium-term average rather than as a rate (or band of rates) that must be held at all times.’13 The RBA uses monetary policy to achieve this inflation target:
The principal medium-term objective of monetary policy is to control inflation, so an inflation target is thus the centrepiece of the monetary framework.14
3.12 On the rationale for applying a target rate of between two and three per cent, on average, the RBA states that ‘[t]his is a rate of inflation sufficiently low that it does not materially distort economic decisions in the community. Seeking to achieve this rate, on average, provides discipline for monetary
11 Mr Philip Lowe, Governor, RBA, Committee Hansard, 11 February 2022, p. 1.
12 RBA, ‘About Monetary Policy’, < https://www.rba.gov.au/monetary-policy/about.html>, viewed 3
March 2022.
13 RBA, ‘About Monetary Policy’, < https://www.rba.gov.au/monetary-policy/about.html>, viewed 3
March 2022.
14 RBA, ‘About Monetary Policy’, < https://www.rba.gov.au/monetary-policy/about.html>, viewed 3
March 2022.
BROADER ECONOMIC CONDITIONS AND OTHER ISSUES 21
policy decision-making, and serves as an anchor for private sector inflation expectations.’15
3.13 The committee questioned the appropriateness of this target and suggested that a specific target—2.5 per cent—as opposed to a target range and a medium-term average, may produce better results. The Governor responded that ‘[i]t might affect the way we communicate, but in practical terms I don’t think it would make that much difference. What we’re trying to do over long periods of time is deliver an average inflation rate of 2.5, roughly, somewhere in the midpoint of the two and three per cent range’.16
3.14 Continuing on this theme, the Governor observed the following:
The more important point—and this is coming out of many central bank reviews—is that, at least in the current state of the world, the best monetary policy approach is a flexible inflation target with a focus also on what's going on in the labour market. That's the approach that we've had. Having the two to three per cent, on average over time, I think, sends the message that we do have flexibility and we're prepared to use it. Having a number that's just 2½ per cent on the surface implies less flexibility but, in practice, it may not. Either of these arrangements could work, but what's really important is that, whatever arrangement we have, we have flexible inflation targeting with a strong focus on the labour market. The Fed has that, the Bank of Canada has that, the ECB [European Central Bank], the Bank of England—they're all there.17
3.15 The committee asked how inflation is measured and whether it factors in rising prices in the property sector. The Governor responded that:
The inflation measures that we have measure the average price of goods and services, and the ABS [Australian Bureau of Statistics] does a remarkably good job, by international standards, at measuring the price of goods and services. We have separate price indices for housing. Australia has a very good housing price series as well. So we measure both of those quite well. Really the issue is, in thinking about economic policy, what weight we put on goods and services prices versus asset prices… 18
15 RBA, ‘About Monetary Policy’, < https://www.rba.gov.au/monetary-policy/about.html>, viewed 3
March 2022.
16 Mr Philip Lowe, Governor, RBA, Committee Hansard, 11 February 2022, p. 9.
17 Mr Philip Lowe, Governor, RBA, Committee Hansard, 11February 2022, p. 10.
18 Mr Philip Lowe, Governor, RBA, Committee Hansard, 2 December 2020, p. 5.
22 UNCHARTED TERRITORY: REVIEW OF THE RESERVE BANK OF AUSTRALIA ANNUAL REPORTS 2019 AND 2020
3.16 Since 2016, Australia has experienced persistently low inflation, and the RBA has consistently missed its target band for inflation of between two and three per cent. The Governor explained that the COVID-19 situation ‘reinforced the disinflationary forces in the global economy’, with inflation falling into negative territory in the June quarter of 2020 for ‘the first time since the early 1960s.’19 Since that low, inflation has steadily increased.
3.17 In December 2021, the ABS reported a Consumer Price Index (CPI) rise of 3.5 per cent. As the RBA’s inflation target is expressed in CPI inflation— ‘headline inflation’—the current rate is now above the RBA’s inflation target band.20 This rise was the result of large price hikes in new dwellings and automotive fuel. Price rises on new dwellings and automotive fuels were significantly impacted by the COVID-19 situation, with the Commonwealth Government’s HomeBuilder grant scheme putting upward pressure on construction costs and higher global demand for fuel coming off the back of the COVID-19 crisis resulting in the largest price increases in fuel since the 1990s. The trimmed mean annual inflation rate, or ‘underlying inflation’, which excludes large price rises and falls, amounted to 2.6 per cent, the highest rate since June 2014.21
3.18 When asked to reflect on the reasons the RBA missed its inflation target over an extended period, the Governor observed the following:
We are always trying as hard as we can in an uncertain world. In previous hearings we've discussed the factors that led to inflation here and in almost every other country. Remember when President Trump was in power in the US there were all those trade tensions which were dislocating the global economy and led to slower growth than we expected. On the supply side of the labour market in Australia, we had a very big increase in labour force participation such that when there was strong jobs growth that didn't translate into strong wages growth because more and more people kept entering the labour force. We were able to tap into the global labour market as well. So there were those global developments going on with the labour supply side of the economy. We had this period where housing prices were declining, and
19 Mr Philip Lowe, Governor, RBA, Committee Hansard, 2 December 2020, p. 5; Mr Philip Lowe,
Governor, RBA, Committee Hansard, 6 August 2020, p. 2.
20 RBA, ‘Inflation and its Measurement’,
21 Philip Lowe, ‘The Year Ahead’, address to the National Press Club of Australia, 2 February 2022,
BROADER ECONOMIC CONDITIONS AND OTHER ISSUES 23
that led to slower consumption and less spending than we expected. So that was that period of undershooting the inflation target. It wasn't a lack of effort by the Reserve Bank; there were just other things going on in both the global and Australian economies that led to us undershooting.22
3.19 Given the extended period of lower-than-target inflation, the committee asked whether the RBA would tolerate a period of above three per cent inflation. The Governor responded that:
We're not setting out to say we want to have higher inflation for a few years to offset the under. That's not how we think about it. But the approach that we're running at the moment—waiting for the evidence—does run the risk that inflation will be above three per cent for a period of time. That risk is acceptable. In fact, I think running that risk is the appropriate thing to do. If, in a parallel world, inflation had been three per cent for the past decade, I think we'd probably be less tolerant of a period above target now, but we've had six or seven years where we've been below the midpoint in terms of underlying inflation. Given the history, it makes sense to run a policy that does have a material chance that inflation is above three per cent for a while. Intentionally I've said it, but the policy approach allows it; the history doesn't. That's where we are now. 23
3.20 The committee noted that the latest inflation figure in the United States was 7.5 per cent, a rate not seen since the Reagan presidency. The committee asked how Australia differed and whether there was a danger that Australia would now head into a period of high inflation. The Governor replied that:
US inflation is 7½. In Australia underlying inflation is 2½ and headline is 3½. In the US, utility prices—this was in last night's CPI—are up 25 per cent. In much of Europe it is 25 per cent. I think in the UK it is even more than that. In Australia the price of electricity and gas in the last year has hardly moved at all for consumers, and for some consumers the prices have actually declined. Our utility and gas markets are in a very different place to those in the North Atlantic. So that's a first-order difference.
…
Another first-order difference is what's going on in the labour market. Largely because of the design of the labour support programs through the pandemic in Australia, the connection between workers and their firms has been sustained in Australia. That is not the case in the US. The design of their
22 Mr Philip Lowe, Governor, RBA, Committee Hansard, 11 February 2022, p. 8.
23 Mr Philip Lowe, Governor, RBA, Committee Hansard, 11 February 2022, p. 9.
24 UNCHARTED TERRITORY: REVIEW OF THE RESERVE BANK OF AUSTRALIA ANNUAL REPORTS 2019 AND 2020
support during the pandemic did not keep this connection alive. So, when the labour market recovers and demand for workers increases, firms have to go out and seek new labour again, in a way they haven't had to do in Australia. That's put upward pressure on wages in the US and in the UK. The US has also seen a big decline in labour force participation. In Australia it's risen. The labour market is not knitting back together in the US in the way that it has in Australia. It's fundamentally different, and the institutional features of our labour market are quite different as well, with enterprise bargains going over multiple years and annual award cases.24
3.21 At the public hearing on 11 February 2022, approximately two weeks ahead of Russia launching its invasion of Ukraine, the committee asked how the Australian economy could be impacted by turmoil in Europe and disruptions to the gas supply by Russia. The Governor replied that:
We've thought about that. It's kind of an upside risk to gas prices. But we're not going to forecast how those geopolitical issues play out. At the moment what we know is that the prices that Australian households pay for utilities have hardly moved over the past year. They have not gone up 25 per cent. Who knows what's going to happen in the future if there is a conflict in Europe?25
Unemployment and Underemployment
3.22 The COVID-19 recession led to the highest unemployment rate in Australia in over 20 years, peaking at 7.5 per cent in August 2020. Since its peak, the unemployment rate has been on a steady decline. By December 2020, unemployment had dropped to 6.6 per cent, and by June 2021 had decreased to 4.9 per cent.26 In its latest announcement—for February 2022—the ABS reported unemployment to have decreased further, to 4 per cent.27
24 Mr Philip Lowe, Governor, RBA, Committee Hansard, 11 February 2022, p. 6.
25 Mr Philip Lowe, Governor, RBA, Committee Hansard, 11 February 2022, p. 6.
26 ABS, ‘Labour Force, Australia, December 2020’, 21 January 2021,
27 ABS, ‘Labour Force, Australia, February 2022’, 17 March 2022,
BROADER ECONOMIC CONDITIONS AND OTHER ISSUES 25
3.23 The gradual fall in unemployment has been mirrored by an overall declining rate of underemployment. From a rate of 11.2 per cent in August 2020, underemployment fell to 8.3 per cent in July 2021, and 6.6 per cent in December 2021, before a slight rise again to 6.7 per cent in January 2022 and a decline again to 6.6 per cent in February 2022.28
3.24 The committee noted that between the end of World War II and the 1970s, there was an average unemployment rate of around 2 per cent, and that this was considered ‘full employment’. The committee sought the Governor’s views on what currently constitutes ‘full employment’. He responded that:
My current judgement…is that it's some number starting with a four. That's lower than two years ago, when we thought somewhere between five and 5½ per cent was full employment. Can we ultimately go lower than that? It's possible, but, over time, I think there's been an increase in the structural rate of unemployment. The social safety net is much more generous than it was in the 1950s, so that influences people's choices. There are probably bigger mismatches between people's skills and the demand for labour. In an economy that's undergoing a lot of structural change, there is more skills mismatch, which means a higher rate of unemployment. If we could get back to four-point-something that would be a very good outcome. If we are going to go lower than that over time, it will require addressing issues in the design of the social safety net and jobs mismatch—the education system. But if we can get strong enough aggregate demand I think we can get back to four-point-something. 29
3.25 When asked why Australia is experiencing such low rates of unemployment, the Governor suggested that ‘the main reasons…is that we have had unprecedented monetary and fiscal stimulus working together.’ Expanding on this, he stated that:
28 ABS, ‘Labour Force, Australia, August 2020’, 17 September 2020,
29 Mr Philip Lowe, Governor, RBA, Committee Hansard, 2 December 2020, p. 23.
26 UNCHARTED TERRITORY: REVIEW OF THE RESERVE BANK OF AUSTRALIA ANNUAL REPORTS 2019 AND 2020
No doubt the closure of the borders has left some labour markets tighter than they would otherwise be but that is not why the national unemployment rate is heading to four per cent and vacancies are at record lows. I note that in many other countries unemployment rates are also quite low. Again, fiscal and monetary policy works. Other countries do not have low unemployment because the borders are closed; they have it because of the success of the policy response.30
3.26 In February 2022, the Governor informed the committee that the RBA forecast for the unemployment rate is for it ‘to decline to below four per cent later this year and to remain below four per cent next year’.31
3.27 The committee asked whether this forecast factored in the opening of the borders and consequential population increase. The Governor replied that even accounting for these factors, ‘we still think the unemployment rate will come down to below four per cent’.32
3.28 Moving to underemployment, the committee mentioned that in the 1980s and 1990s underemployment was systematically lower than unemployment and there was, therefore, a focus on unemployment in discussions of wage growth. Considering that currently underemployment is consistently higher than unemployment, the committee asked how underutilisation affected wage growth. The Governor responded with the following:
A third of the workforce is now working part time, which from many perspectives is fantastic because it opens up opportunities for participation that people didn't have when we all had to work either zero or 40 hours a week. So it's a much better world than we were in before, but quite a few of those people working part time, roughly a quarter of them, aren't happy with the hours they have. So when you have a third of the workforce working part time and a quarter of those wanting to work more hours that's quite a big source of additional labour supply that when the economy is doing quite well can be absorbed if these people are happy to work more at the existing wage. If there is more demand for labour then there will be more supply fairly readily. So it's quite an important consideration when thinking about wage dynamics… 33
30 Mr Philip Lowe, Governor, RBA, Committee Hansard, 11 February 2022, p. 23.
31 Mr Philip Lowe, Governor, RBA, Committee Hansard, 11 February 2022, p. 2.
32 Mr Philip Lowe, Governor, RBA, Committee Hansard, 11 February 2022, p. 12.
33 Mr Philip Lowe, Governor, RBA, Committee Hansard, 6 August 2021, p. 20.
BROADER ECONOMIC CONDITIONS AND OTHER ISSUES 27
Wage Growth
3.29 Australia has experienced persistently low wage growth for nearly a decade. Between 2008 and 2013 the Wage Price Index (WPI) rose by 3.3 per cent per annum. By contrast, between 2013 and 2019 the WPI rose on average by 2.2 per cent per annum. In 2020, with the impact of the COVID-19 recession, annual growth fell to 1.4 per cent. In 2021, the WPI rose again to 2.3 per cent over the year.34
3.30 The Governor informed the committee that the issue of low wage growth was one that he had been ‘calling out’ for at least two or three years. The Governor mentioned that while there has ‘been a strong increase in demand’ there has also been ‘a big increase in supply that’s put downward pressure on wages’.35 The Governor also stated his view that it was ‘largely structural global factors that are delivering the low wage growth’ and noted that ‘wage growth everywhere around the world has been weak, reflecting globalisation, technology, shifts in the bargaining power of labour’.36
3.31 Expanding on this latter point, the Governor observed the following:
Before the pandemic, there had been, in many countries, a shift of national income towards the owners of capital and away from workers. So, to put it another way, the profit share in many countries was very high. That's a structural and secular shift that's been with us for a number of years and in a number of countries. So it's not something unique to Australia; it's a global issue, which has global roots. We've talked about those: the globalisation of supply chains and the changes in technology that have made many more jobs internationally contestable. I think I've talked to this committee before about a professional services firm that had the chief executive's PA [personal assistant]
34 Geoff Gilfillan, ‘The extent and causes of the wage growth slowdown in Australia’, 9 April 2019,
Parliamentary Library,
35 Mr Philip Lowe, Governor, RBA, Committee Hansard, 6 August 2020, p. 8.
36 Mr Philip Lowe, Governor, RBA, Committee Hansard, 5 February 2021, p. 6.
28 UNCHARTED TERRITORY: REVIEW OF THE RESERVE BANK OF AUSTRALIA ANNUAL REPORTS 2019 AND 2020
sitting in Manila. Who would have thought—I certainly wouldn't have a decade ago—that the PA to a chief executive of an Australian firm would be an internationally traded service? But it is, and that has meant that the competitive dynamics in the labour market have changed, because many, many people have realised that their job can be done somewhere else in the world, perhaps at a lower rate, and it actually affects wages. 37
3.32 The Governor went on to explain that the RBA’s job was to ensure ‘that the labour market is as tight as it can reasonably be so that firms decide they have to pay higher wages to attract the workers they need.’38 That is, according to the Governor, job creation was the surest path to encourage more robust wage growth:
If we can create jobs, the labour market will tighten up. Firms will have to compete more for workers, they'll have to pay higher wages not only because the labour market's tight but because productivity is lifting… 39
3.33 The committee acknowledged that productivity growth was important but expressed concern that productivity gains had not flowed through to wage growth. It asked if the Governor was concerned with how gains in productivity are shared through society. The Governor responded that:
If you can get the labour market tight enough, wage pressures will start to emerge, but you've got to have the labour market quite tight for quite a long time. That's our challenge: to have a tight labour market and to sustain it for quite a long time. This is one reason we're talking about interest rates and monetary support being there for a long time. We want to see a tight labour market, and we want to see it sustained, and what the Reserve Bank can do for that is to provide monetary support for a long time. If we can do that, I think wages growth will pick up. 40
3.34 On the relationship between low unemployment and wage growth, the Governor observed that New South Wales and Victoria had experienced periods when unemployment was around four per cent and ‘aggregate wages growth didn’t move’. Continuing, he noted that in ‘WA now the unemployment rate is 3½ and wages are moving up, but not that much. So
37 Mr Philip Lowe, Governor, RBA, Committee Hansard, 5 February 2021, p. 21.
38 Mr Philip Lowe, Governor, RBA, Committee Hansard, 5 February 2021, p. 21.
39 Mr Philip Lowe, Governor, RBA, Committee Hansard, 5 February 2021, p. 6.
40 Mr Philip Lowe, Governor, RBA, Committee Hansard, 5 February 2021, p. 21.
BROADER ECONOMIC CONDITIONS AND OTHER ISSUES 29
we want to see how that goes, and I think these uncertainties are not going to be resolved quickly.’41
3.35 Looking forward, the Governor provided the following projection on wage growth:
A further pick-up in overall wages growth is expected, although this is likely to be a gradual process, given the institutional features of our labour market. These include multiyear enterprise agreements, an annual review of award wages and public sector wages policies. We're also expecting broader measures of labour cost growth to pick up faster and growth in the Wage Price Index. 42
3.36 The committee asked how the increase to the Compulsory Superannuation Guarantee would impact wages and employment. The Governor responded that:
I don't know whether it would have a negative effect on employment. It would certainly have a negative effect on wages growth. If this increase goes ahead, I would expect wage growth to be even lower than it otherwise would be. So there will be an offset in terms of current income. Some people say that's perfectly fine because people will have higher future income. There's a trade-off: do we want people to have income now, or do we want them to have it later on? Different people will view that trade-off quite differently…43
3.37 Noting that inflation is forecast to increase faster than wage growth, therefore resulting in a decline in real wages, the committee asked whether real wages would be declining if the legislated increase in compulsory superannuation were not proceeding. The Governor responded that:
I think the other consideration we're focused on here is that broader measures of labour costs are rising more quickly than wages, as indicated by the WPI. The broader measures of labour costs include the superannuation contribution increase…and the increases people get by jumping or changing employers, or by people getting internal promotions. So there are a lot of other ways that people's pay can increase other than through increasing base pay in their current job. We're expecting those other measures of wages growth to increase quite a lot faster than the WPI over the next couple of years. Overall wages, I think, will be rising more quickly than inflation, even if the WPI isn't. 44
41 Mr Philip Lowe, Governor, RBA, Committee Hansard, 11 February 2022, p. 25.
42 Mr Philip Lowe, Governor, RBA, Committee Hansard, 11 February 2022, p. 2.
43 Mr Philip Lowe, Governor, RBA, Committee Hansard, 6 August 2020, p. 7.
44 Mr Philip Lowe, Governor, RBA, Committee Hansard, 11 February 2022, p. 5.
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Labour Supply and Migration
3.38 The committee asked about the impact of severe labour shortages on certain industry sectors and regional communities. The Governor responded that ‘[i]t is certainly not an issue the central bank can solve through setting up incentives. Governments can do something or private businesses can do something but we don’t have any tools to address it.’ The Governor, further, noted that ‘the available jobs are dwarfed by the number of people who really want them’ and suggested that what the RBA can do is ‘create conditions to make sure there is a stronger demand for labour right across the country’.45
3.39 The Governor emphasised that the issue of industry and region-specific labour shortages relates to ‘training and incentives for mobility’ and suggested that ‘anything that impedes mobility is going to be bad for the economy.’ He suggested that the removal of inefficient tax regimes, such as stamp duty on property, and investment in transport infrastructure could be means to promote the greater mobility of the population.46
3.40 The committee asked how rural and regional labour shortages are impacting production. The Assistant Governor (Economic) replied that the RBA talks ‘to a lot of businesses in many industries and we do hear these sorts of reports [of labour shortages], both from our own networks and from our liaison partners, but when you aggregate it all up to actual rural production and actual rural exports we’re not seeing it influence the aggregate’.47
3.41 The committee asked about when the potential impacts of rural labour shortages may be seen. The Assistant Governor (Economic) responded that:
There is very good data on rural production and rural exports, so I think we would start seeing it there, and we would start seeing it in tonnage numbers. One of the things that may be making it hard to disentangle this, of course, is one of the things we were talking about this time last year, which was the drought. In the midst of the pandemic the drought has broken, so that has some important shifts in rural production. You see more grain output, but you actually see less meat output because farmers want to rebuild their herds. They slaughter a lot of animals during drought, so meat production goes up in droughts and then that reverses out. If there was a production issue, we would hear about it from the supermarkets in terms of their meat costs. We would
45 Mr Philip Lowe, Governor, RBA, Committee Hansard, 2 December 2020, p. 20.
46 Mr Philip Lowe, Governor, RBA, Committee Hansard, 2 December 2020, p. 20.
47 Dr Luci Ellis, Assistant Governor (Economic), RBA, Committee Hansard, 5 February 2021, p. 24.
BROADER ECONOMIC CONDITIONS AND OTHER ISSUES 31
see it in the consumer price index. But we're not seeing anything anomalous for a recovery from drought. It may well be an additional factor, but there's nothing anomalous relative to the fact we're coming out of drought. 48
3.42 The committee asked how the cessation of in-bound skilled migration had impacted economic activity in the country. The Governor noted that population growth had fallen to 0.25 per cent, dropping from averages of 1.5 to 1.75 per cent per annum prior to the pandemic; ‘[t]he slower population growth obviously feeds directly through into growth in demand in the economy, so we’re getting lower growth because of the closure of the borders.’ Additionally, with 200,000 less temporary workers in the country, certain industry sectors were being particularly affected, such as hospitality, agriculture, and aged care. These shortages had ‘put some upward pressure on labour costs.’49
3.43 The committee suggested a potential corollary of less inward-bound migration was lower-skilled and lower-paid domestic workers being paid more and given greater working opportunities. The Governor responded that ‘[a]ll evidence is that, over long periods of time, having foreign workers come into Australia adds to both supply and demand and really doesn’t affect the aggregate level of wages in Australia.’ Elaborating on this, the Governor stated that:
It's clear that when you have a sudden change in the flow of labour, which is what we've had, that has first-order effects, in particular in labour markets… It has also affected the ability of firms to do investment because they can't get the skills they need. You might think it's good with more demand for domestic Australian workers because there are fewer backpackers and foreign students… but, on the other hand, it has made it harder for firms to expand their capacity, and that's bad for wealth generation in the end. 50
Housing Affordability
3.44 The committee asked about the best ways to promote housing affordability. The Governor noted that ‘[l]ike most things, prices are determined by the combination of demand and supply.’ He said that ‘[w]e can’t do very much
48 Dr Luci Ellis, Assistant Governor (Economic), RBA, Committee Hansard, 5 February 2021, p. 24.
49 Mr Philip Lowe, Governor, RBA, Committee Hansard, 11 February 2022, p. 11.
50 Mr Philip Lowe, Governor, RBA, Committee Hansard, 11 February 2022, p. 12.
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about the demand side’ as people wanted to live in houses in good locations. Instead, the supply side needed to be ‘more flexible’.51
3.45 Expanding on this, the Governor emphasised that the main supply factor was flexible zoning. He stated: ‘How to make housing more affordable is about supply—supply, supply, supply—that’s our observation: doing what we can to make the supply of land and housing, and that comes through zoning and the flexibility of the zoning requirements… It would be for me in many ways the single biggest thing we could do for people’s welfare.’52
3.46 Additionally, the Governor observed the importance of investment in transport infrastructure:
The other thing that's increased housing prices over time is inadequate investment in public and private transport, because…the main cost of housing in many parts of the country is the price of the land, and the land prices are higher because there's strong demand for well-located land. The supply of that pushes up the price, and we can increase the supply of well-located land through good investment in transport. So the best way of making housing affordable for people, I think, is transport policy and zoning and planning rules. The tendency always is to give people money to try and make housing more affordable. That affects the demand side, and I understand why that's the response, but the best response is on the supply side, whether it's transport, zoning or planning. Whether there's a role for the federal and state governments working together I'm not sure, but what I'm sure of is that the issue exists, and it would make a difference to our housing prices in a way that makes housing more affordable for people. 53
Digital Currency
3.47 The committee asked about the RBA’s views on the future prospects for an Australian digital currency and work that it was undertaking on this issue. The Governor gave the following response:
It is possible, with technology, for us to issue tokens that people would have. So, rather than having a bank note, you would have a token that's issued by the central bank and would sit in your electronic wallet. Maybe you'd get the token through your bank. That's one form of central bank digital currency that people are looking at. My view is that, at the moment, it's unlikely to serve the public interest for to us do that, even if we could do it from a technology
51 Mr Philip Lowe, Governor, RBA, Committee Hansard, 11 February 2022, p. 6.
52 Mr Philip Lowe, Governor, RBA, Committee Hansard, 6 August 2020, p. 19.
53 Mr Philip Lowe, Governor, RBA, Committee Hansard, 6 August 2020, p. 9.
BROADER ECONOMIC CONDITIONS AND OTHER ISSUES 33
perspective. That's retail. So, rather than using bank notes, we'd just put our phones together and the tokens would move across the phones or whatever. That's one form of digital currency. The other liability the central bank has at the moment is an exchange settlement account. These are the accounts that banks have with us that they use to exchange value between themselves. You can imagine them doing that with a token. Rather than changing the balance in the account, we would issue these tokens and they would send a token from one bank to another. We're working with some of the banks and some technology companies to see if we could do that for the settlement of syndicated loans, because you could exchange the token plus some other contractual rights at exactly the same time as the token. So you could merge these things together to get a better settlement system and get clearer exchange of value with legal rights changing at exactly the same time. 54
3.48 The Governor went on to emphasise that the RBA was ‘still in the exploration phase, from both a technology point of view and a policy view. If we can move and it makes sense and is in the public interest, it will help the efficiency of the payments and settlement system in Australia.’55 He told the committee that ‘we have the resources to study and to undertake proof-of-concept experiments with a number of other central banks, which we are currently doing. We are devoting significant resources to understanding how new forms of digital money can be used in the economy to make it easier for businesses and households.’56
3.49 The committee asked whether central-bank-issued digital currencies should be managed by an international body. The Governor responded with the following:
Not at the moment. If we're just talking about these wholesale settlement tokens, that's something that can be done within a single country. In time that may be able to be done across countries, but the exploration of that is still at very early stages. If we move to a world where there is a central bank digital currency available for use by the general public, that creates potentially very large issues. Another version of this is that the tokens that move between our phones are not issued by the central bank; they're issued by a private company. It may be a private technology company. That raises huge numbers of issues. You will have seen Facebook's Libra project. An international college chaired by the Swiss authority is looking at how that would work. I can tell you that at the central bank meetings I go to there are very significant concerns
54 Mr Philip Lowe, Governor, RBA, Committee Hansard, 2 December 2020, p. 25.
55 Mr Philip Lowe, Governor, RBA, Committee Hansard, 2 December 2020, p. 25.
56 Mr Philip Lowe, Governor, RBA, Committee Hansard, 6 August 2021, p. 6.
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about the shape of the global monetary system if that became the way that we shifted our tokens between one another, that tokens were issued by Facebook. There's an international college looking at that currently. There are huge numbers of issues to work through. 57
3.50 The committee asked about the future of physical currency in an increasingly digital economy. The Governor replied that:
I think we will see more digital payments if people have confidence that the digital payment system is working all the time, that the cost of digital payments is low and the digital payment systems is offering the functionality that they deliver. I am always encouraging other banks to work on those—low cost of payments, reliability and security of digital payments. But I do think there will be a long residual demand for bank notes for a couple of reasons. One, it's anonymous. Not everyone likes using their bank accounts to make every payment because you leave electronic fingerprints. There are legitimate reasons and illegitimate reasons for that. People— and I feel this as well— want to carry some bank notes in their wallet just in case the electronic payment system goes down and some people like the comfort of holding bank notes as a store of value. So I hesitate to make predictions in this area but I think we'll be producing bank notes for a long period of time but they could well turn into a bespoke product. 58
Digital Wallets
3.51 The committee noted significant market concentration in the digital wallet area and the threat that this poses to competition. The committee asked how the RBA was responding to this trend. The Governor responded that regulatory arrangements need to keep pace with technological change and that there was a process to ensure that this was the case. He explained that the Government had commissioned a review of the matter and has ‘also committed to reviewing the regulatory arrangements that apply to stored value instruments, which are part of the new payment landscape’. He suggested that ‘[w]e need better arrangements for regulating stored value’ and that there is a need to ‘update the legislation, including perhaps … a special licensing regime for payment providers’.59
57 Mr Philip Lowe, Governor, RBA, Committee Hansard, 2 December 2020, p. 26.
58 Mr Philip Lowe, Governor, RBA, Committee Hansard, 5 February 2021, p. 13.
59 Mr Philip Lowe, Governor, RBA, Committee Hansard, 6 August 2021, p. 6.
BROADER ECONOMIC CONDITIONS AND OTHER ISSUES 35
3.52 The committee asked whether the RBA was concerned about the domination of the digital payment landscape by Apple which requires payments to be channelled through their product—Apple Pay. The Governor responded that:
Apple Pay is clearly one that a number of countries are focused on—the fact that at least with the iPhone you have to use the Apple Pay wallet, and you can't provision another wallet on the phone. Some countries are requiring Apple to adjust its design to allow multiple wallets to be put on the phone. That's something the Reserve Bank can't do. The parliament could set up a process to do that, if it so chose. We are going to have a more competitive system if there can be competition amongst the providers of digital wallets. Ultimately, there will be lower fees and better services if we have competition and open access. So that is an issue. It's not something the Reserve Bank can do anything about. We do not have the power to do it. 60
Reserve Bank Governance Issues
Review of the Reserve Bank
3.53 In August 2021, the committee noted international examples of central banks undertaking fundamental reviews of monetary policy and asked whether the RBA would support a review into the RBA. The Governor provided the following response:
…let's think about what that means, because there are three elements of the monetary policy framework. There's the element that's controlled by the parliament, there's one controlled by the government and there's one controlled by the board. The parliament sets our legislation. It wrote that legislation in 1959, and I think it's very sound. Your committee plays a role here in keeping the bank accountable, and this process we're going through is part of that.
So, the parliament has a role in setting the legislation and keeping us accountable. The government makes appointments to the Reserve Bank Board. So, they're responsible for the people who go on the board. The government and I as the governor sign a letter setting out our common understanding of how monetary policy works, and ultimately the government, under a provision of the Reserve Bank Act, can determine to override the decisions of the board with appropriate oversight from the parliament. So, the government has a role there. And the third element is the board, which has the
60 Mr Philip Lowe, Governor, RBA, Committee Hansard, 6 August 2021, p. 7.
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responsibility for carrying out the legislative responsibilities, and it's advised by the staff.
So, when people say that there should be a review of the Reserve Bank, I'm not sure what they're calling for—a review of the legislation, the mandate, the way the government appoints people to the board, the type of people they put on the board, or how we've done our job; we haven't done our job effectively. All those things get conflated. What I'm responsible for is how we do our job, and the monetary policy regime that we employ.61
3.54 In September 2021, the Organisation for Economic Development and Co-operation (OECD) noted the ‘institutional and structural changes that have occurred in the economy as a result of the pandemic and the unconventional policy instruments the RBA has begun to employ’.62 Accordingly, the OECD recommended that a review be undertaken into Australia’s monetary policy framework that is broad in scope, ‘transparent and involves consultation with a wide variety of relevant stakeholders.’63
3.55 Since that time, both the Treasurer, the Hon Josh Frydenberg MP, and the Shadow Treasurer, Dr Jim Chalmers MP, have committed their respective parties, should they form government following the 2022 federal election, to an independent review of the RBA.64
Pay Secrecy Clauses and Gender Pay Equity
3.56 The committee noted the tendency for pay secrecy clauses to put downward pressure on wages and contribute to gender pay inequity. It asked about the RBA’s internal position on pay secrecy clauses. The Governor replied that:
I don't mind what people talk about with one another. If they want to talk about that, that's perfectly fine. I think the staff know my view on wages. I would like to have faster wage increases for the country as a whole and for my own staff. I have been very public about that. We are currently undertaking an enterprise agreement discussion, which is complicated, as you can imagine, given that is my view. I am also endeavouring, as best I can, to abide by the government's workplace bargaining policy. I thought that might be where you
61 Mr Philip Lowe, Governor, RBA, Committee Hansard, 6 August 2021, p. 8.
62 Organisation for Economic Cooperation and Development (OECD), OECD Economic Survey of
Australia, September 2021, Paris: OECD Publishing, p. 27.
63 OECD, OECD Economic Survey of Australia, September 2021, Paris: OECD Publishing, p. 13.
64 Hon Josh Frydenberg MP, Treasurer, and Dr Jim Chalmers MP, Shadow Treasurer, referenced in
Ronald Mizen, ‘RBA should face independent review: Frydenberg’, The Australian Financial Review, 7 January 2022.
BROADER ECONOMIC CONDITIONS AND OTHER ISSUES 37
were going, but the idea of trying to keep secrets from our staff around pay and reducing pay is so alien. That's why when you asked the question I was a bit taken aback, because it is so alien to my way of thinking. 65
3.57 The Governor later confirmed that ‘some of the employment contracts [at the RBA] do include a clause that says that you must keep the terms of the agreement and any subsequent amendments confidential’. He continued: ‘From my individual perspective, people should be free to talk about their remuneration with their colleagues, so I'm going to go back and look at why we have that clause. It's so alien to me to say that you can't talk about the employment relationship with your peers.’ 66
3.58 The Governor told the committee that he would take action to address the issue:
I send a weekly email to all the staff at the Reserve Bank saying what I've been doing during the week, and I'll include this issue in my email this afternoon. The HR department tells me that the motivation for the clause is to preserve the confidentiality of contractual terms between the employee and the employer and that it is a standard kind of clause in many contracts, but openness and transparency about these things serves us all well… 67
3.59 At a subsequent hearing, the Governor informed the committee that the RBA ‘did a review and changed’ the pay secrecy clauses in its employment contracts.68
Conclusions
3.60 The period under review in this report has been dominated by the impact of the global COVID-19 pandemic. The pandemic and associated public health measures has seen Australia enter recession for the first time in nearly three decades. The unprecedented fiscal and monetary responses coordinated by federal and state and territory governments, the banking sector, regulators, and the RBA provided the Australian economy the resilience to emerge from the crisis in a relatively strong position.
3.61 Since the peak of the economic downturn in mid-to-late-2020, the Australian economy has rebounded strongly, with the economy back to positive
65 Mr Philip Lowe, Governor, RBA, Committee Hansard, 6 August 2021, p. 9.
66 Mr Philip Lowe, Governor, RBA, Committee Hansard, 6 August 2021, p. 13.
67 Mr Philip Lowe, Governor, RBA, Committee Hansard, 6 August 2021, p. 13.
68 Mr Philip Lowe, Governor, RBA, Committee Hansard, 11 February 2022, p. 26.
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growth, unemployment at historic lows, and inflation moving within the RBA’s target range. While wage growth remains subdued, modest growth is forecast over the coming years.
3.62 The Russian invasion of Ukraine will likely result in increased inflation globally, but the full impact of the conflict on the Australian economy is still uncertain.69 New strains of COVID-19 may still yet result in further economic uncertainties. In these unpredictable economic times, monetary policy will continue to be an important policy lever in buttressing the stability and vitality of the Australian economy and through that the prosperity and general well-being of the Australian people.
3.63 The economy is continuously evolving in line with technological innovation and the RBA needs to be flexible in changing with the times. The committee will continue to scrutinise the RBA’s readiness to adapt to the challenges of the digital economy, including the rise of digital wallets and digital currencies.
3.64 The committee notes the September 2021 OECD report recommending a broad review of the RBA and monetary policy in Australia, and the Treasurer’s and Shadow Treasurer’s subsequent comments indicating support for such a review. Similarly, the committee welcomes the prospect of an independent review of the RBA and looks forward to oversighting changes in RBA practice that could be expected to stem from a review.
3.65 The committee will continue to scrutinise the RBA’s policy responses to current and emerging threats to the strength of the nation’s economy and ensure the transparency and accountability of RBA decisions.
3.66 On 10 March 2022, RBA Deputy Governor, Dr Guy Debelle, announced that he would be leaving the RBA to pursue an opportunity in the private sector. The committee has consistently found Dr Debelle a thoughtful and knowledgeable witness, and we are grateful for his insights in our hearings, as well as his long and distinguished service to the RBA. The committee wishes Dr Debelle all the best in his future endeavours.
69 Shane Wright, ‘Ukraine invasion to hit Australian economy and drive up prices: S&P Global’, 10
March 2022, The Sydney Morning Herald, < https://www.smh.com.au/politics/federal/ukraine-invasion-to-hit-australian-economy-and-drive-up-prices-s-and-p-global-20220309-p5a379.html>, viewed 15 March 2022.
39
A. Hearings, briefings and witnesses
Public Hearings
Friday, 14 August 2020—Canberra and Videoconference
Reserve Bank of Australia
ï§ Mr Philip Lowe, Governor ï§ Dr Guy Debelle, Deputy Governor ï§ Dr Luci Ellis, Assistant Governor (Economic) ï§ Ms Michele Bullock, Assistant Governor (Financial Systems) ï§ Dr Christopher Kent, Assistant Governor (Financial Markets)
Wednesday, 2 December 2020—Canberra
Reserve Bank of Australia
ï§ Mr Philip Lowe, Governor ï§ Dr Guy Debelle, Deputy Governor
Friday, 5 February 2021—Canberra and Videoconference
Reserve Bank of Australia
ï§ Mr Philip Lowe, Governor ï§ Dr Guy Debelle, Deputy Governor ï§ Dr Luci Ellis, Assistant Governor (Economic) ï§ Ms Michele Bullock, Assistant Governor (Financial Systems)
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Friday, 6 August 2021—Canberra and Videoconference
Reserve Bank of Australia
ï§ Mr Philip Lowe, Governor ï§ Dr Guy Debelle, Deputy Governor ï§ Dr Luci Ellis, Assistant Governor (Economic) ï§ Ms Michele Bullock, Assistant Governor (Financial Systems)
Friday, 11 February 2022—Canberra and Videoconference
Reserve Bank of Australia
ï§ Mr Philip Lowe, Governor ï§ Dr Guy Debelle, Deputy Governor ï§ Dr Luci Ellis, Assistant Governor (Economic) ï§ Ms Michele Bullock, Assistant Governor (Financial Systems)
Private Briefings
Wednesday, 12 August 2020
ï§ Ms Joanne Masters, Chief Economist, Ernest & Young Oceania.
Thursday, 4 February 2021
ï§ Mr Saul Eslake, Economist, Corinna Economic Advisory
Wednesday, 4 August 2021
ï§ Mr Richard Yetsenga, Chief Economist, ANZ ï§ Ms Catherine Birch, Senior Economist, ANZ
Thursday, 10 February 2022
ï§ Mr Stephen Walters, Chief Economist, NSW Treasury
41
B. Seventh Statement on the Conduct of Monetary Policy
The Treasurer and the Governor of the Reserve Bank
19 September 2016
The Statement on the Conduct of Monetary Policy (the Statement) has recorded the common understanding of the Governor, as Chair of the Reserve Bank Board, and the Government on key aspects of Australia's monetary and central banking policy framework since 1996.
The Statement seeks to foster a sound understanding of the nature of the relationship between the Reserve Bank and the Government, the objectives of monetary policy, the mechanisms for ensuring transparency and accountability in the way policy is conducted, and the independence of the Reserve Bank.
The centrepiece of the Statement is the inflation targeting framework, which has formed the basis of Australia's monetary policy framework since the early 1990s.
The Statement has also been updated over time to reflect enhanced transparency of the Reserve Bank's policy decisions and to record the Bank's longstanding responsibility for financial system stability.
Building on this foundation, the current Statement reiterates the core understandings that allow the Bank to best discharge its duty to direct monetary policy and protect financial system stability for the betterment of the people of Australia.
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Relationship between the Reserve Bank and the Government
The Reserve Bank Governor, its Board and its employees have a duty to serve the people of Australia to the best of their ability. In the carrying out of their statutory obligations, through public discourse and in domestic and international forums, representatives of the Bank will continue to serve the best interests of the people of Australia with honesty and integrity.
The Governor and the members of the Reserve Bank Board are appointed by the Government of the day, but are afforded substantial independence under the Reserve Bank Act 1959 (the Act) to conduct the monetary and banking policies of the Bank, so as to best achieve the objectives of the Bank as set out in the Act.
The Government recognises and will continue to respect the Reserve Bank's independence, as provided by the Act.
The Government also recognises the importance of the Reserve Bank having a strong balance sheet and the Treasurer will pay due regard to that when deciding each year on the distribution of the Reserve Bank's earnings under the Act.
New appointments to the Reserve Bank Board will be made by the Treasurer from a register of eminent candidates of the highest integrity maintained by the Secretary to the Treasury and the Governor. This procedure ensures only the best qualified candidates are appointed to the Reserve Bank Board.
Objectives of Monetary Policy
The goals of monetary policy are set out in the Act, which requires the Reserve Bank Board to conduct monetary policy in a way that, in the Reserve Bank Board's opinion, will best contribute to:
a. the stability of the currency of Australia;
b. the maintenance of full employment in Australia; and
c. the economic prosperity and welfare of the people of Australia.
These objectives allow the Reserve Bank Board to focus on price (currency) stability, which is a crucial precondition for long-term economic growth and employment, while taking account of the implications of monetary policy for activity and levels of employment in the short term.
SEVENTH STATEMENT ON THE CONDUCT OF MONETARY POLICY 43
Both the Reserve Bank and the Government agree on the importance of low and stable inflation.
Effective management of inflation to provide greater certainty and to guide expectations assists businesses and households in making sound investment decisions. Low and stable inflation underpins the creation of jobs, protects the savings of Australians and preserves the value of the currency.
Both the Reserve Bank and the Government agree that a flexible medium-term inflation target is the appropriate framework for achieving medium-term price stability. They agree that an appropriate goal is to keep consumer price inflation between 2 and 3 per cent, on average, over time. This formulation allows for the natural short-run variation in inflation over the economic cycle and the medium-term focus provides the flexibility for the Reserve Bank to set its policy so as best to achieve its broad objectives, including financial stability. The 2-3 per cent medium-term goal provides a clearly identifiable performance benchmark over time.
The Governor expresses his continuing commitment to the inflation objective, consistent with his duties under the Act. For its part the Government endorses the inflation objective and emphasises the role that disciplined fiscal policy must play in achieving medium-term price stability.
Consistent with its responsibilities for economic policy as a whole, the Government reserves the right to comment on monetary policy from time to time.
Transparency and Accountability
Transparency in the Reserve Bank's views on economic developments and their implications for policy are crucial to shaping inflation expectations.
The Reserve Bank takes a number of steps to ensure the conduct of monetary policy is transparent. These steps include statements announcing and explaining each monetary policy decision, the release of minutes providing background to the Board's policy deliberations, and commentary and analysis on the economic outlook provided through public addresses and regular publications such as its quarterly Statement on Monetary Policy and Bulletin. The Reserve Bank will continue to promote public understanding in this way.
In addition, the Governor will continue to be available to report twice a year to the House of Representatives Standing Committee on Economics, and to other Parliamentary committees as appropriate.
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The Treasurer expresses support for the continuation of these arrangements, which reflect international best practice and enhance the public's confidence in the independence and integrity of the monetary policy process.
Financial Stability
Financial stability, which is critical to a stable macroeconomic environment, is a longstanding responsibility of the Reserve Bank and its Board.
The Reserve Bank promotes the stability of the Australian financial system through managing and providing liquidity to the system, and chairing the Council of Financial Regulators (comprising the Reserve Bank, Australian Prudential Regulation Authority, the Australian Securities and Investments Commission and the Treasury).
The Payments System Board has explicit regulatory authority for payments system stability. In fulfilling these obligations, the Reserve Bank will continue to publish its analysis of financial stability matters through its half-yearly Financial Stability Review.
In addition, the Governor and the Reserve Bank will continue to participate, where appropriate, in the development of financial system policy, including any substantial Government reviews, or international reviews, of the financial system itself.
The Reserve Bank's mandate to uphold financial stability does not equate to a guarantee of solvency for financial institutions, and the Bank does not see its balance sheet as being available to support insolvent institutions. However, the Reserve Bank's central position in the financial system, and its position as the ultimate provider of liquidity to the system, gives it a key role in financial crisis management. In fulfilling this role, the Reserve Bank will continue to coordinate closely with the Government and with the other Council agencies.
The Treasurer and the Governor express their support for these longstanding arrangements continuing.
