Analysis | Global Central Banking Goes on Trial. In Australia

Some key concepts in monetary policy will be scrutinized, and some overdue questions posed about central bank boards and their role. Do these powerful authorities say too little or overshare? Are the right people sitting around the table when decisions are made? Did officials do the right thing in taking out vast insurance against catastrophic outcomes at the onset of the pandemic and then stick with them too long? Expect tough questions about whether inflation targets with a “2” in them — holy writ in global policy the past few decades — do their job. The government also wants a deep dive into the bank’s culture and recruitment, a nod to critiques that the bank is far too insular.    

The review by an outside panel, unveiled by Australian Treasurer Jim Chalmers last week, has a mandate to dig deep. Terms of reference are broad: the bank’s performance, its inflation target, governance and communications. It will inevitably become a de-facto referendum on the recent price surges and the rapid hikes in interest rates. 

By implication, many central banks will be in the dock. Let’s not pretend the RBA is unique: It has mostly been in step with the global mainstream. In the years leading up to Covid, for example, Governor Philip Lowe fretted about inflation being too low, not too high. Officials undershot their 2-3% target for years. That’s just the sort of angst that wracked the Federal Reserve and led to the launch in 2020 of a new policy framework in the US that let rates stay lower for longer — ironically just as the seeds of the recent inflation spiral were being sown. The European Central Bank overhauled its approach last year to achieve the same result. 

Yes, the RBA had an enviable record in that Australia went three decades without recession. That superlative, lauded the world over, masked some important misgivings that top officials had about where the economy was headed and what to do about it. Quantitative easing got a careful even look before Covid. While local, the panel may as well be doing a report card on Jay Powell and Christine Lagarde.

Lowe is braced for some kind of knuckle rap. In what was likely an effort to get ahead of the review, the bank undertook its own examination of totemic pandemic measures: efforts to cap the yield on three-year government debt and bond-buying under QE. Released last month, the first results offered a dash of humility. Officials conceded they stuck with the yield ceiling too long and suffered “some reputational damage” when it was removed. Lowe says he welcomes the public discussion that the review will bring, though he would almost certainly have preferred the appraisal — if it was to be external — to be overseen by Treasury. 

While there are no current RBA or Treasury insiders, the three people on the panel aren’t economic bomb-throwers, either: Carolyn Wilkins, a former Bank of Canada deputy governor, Renee Fry-McKibbin, a professor at the Australian National University, and Gordon de Brouwer, a senior civil servant. Lowe has emphasized in recent public remarks that the reviews by the Fed and ECB recommended more flexible inflation targets, of the kind the RBA already has. That’s true as far as it goes, but that isn’t a great distance. Those two assessments were driven internally — not imposed by the politicians as this one is — and didn’t place a broad array of central bank activities under the microscope. Criticism is mounting across the Tasman Sea as well; the Reserve Bank of New Zealand announced an internal policy review on Tuesday.  

Lowe acknowledges that some insurance taken out against a truly dire and long-lasting slump may have contributed to escalating inflation. He isn’t overly repentant, though — the doctrine of risk management in central banking owes much to the Alan Greenspan era at the Fed. One mistake that does hang over Lowe and has been used as a battering ram by his critics is forward guidance. Even in late 2021, he was saying interest rates might not need to rise until 2024. They were hiked by a quarter-point in May, a step Lowe called “business as usual,” only to change tack a month later with a 50 basis-point hike, followed by another in July. Forward guidance, pioneered by Greenspan and turned into an art form by Ben Bernanke after the 2008 subprime mortgage crisis, has arguably outlived its usefulness. Lowe was unconvinced that high inflation would have staying power. That has more than a whiff of Jay Powell’s infamous prediction last year that price hikes would prove “transitory.”

The RBA has lost its perch as the premier institution. For decades, it wasn’t seriously questioned as the country basked — slumbered might be a better term — in a long boom. Now it’s open season. But don’t expect the ensuing debate to stay in the southwest corner of the Pacific.  

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• ECB Crisis Plan Fails to Convince Bond Traders: Marcus Ashworth

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was executive editor of Bloomberg News for economics.

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