Andrew Leigh

HOUSE OF REPRESENTATIVES, 9 DECEMBER 2020

The committee this year has engaged in a productive series of conversations with a range of entities—ASIC, APRA and the ACCC. We have held a series of hearings with major banks and major superannuation funds and, most recently, we have had productive discussions with the Reserve Bank. As has become clear from these conversations, the Reserve Bank has concerns about the state of the Australian economy. The Reserve Bank governor noted recently: 'What has become clearer, though, as time has passed is that the Australian economy is likely to experience a run of years of relatively high unemployment, unemployment being too high, and wage increases and inflation being too low, leaving us short of the Reserve Bank's goals.' The Reserve Bank's own figures have unemployment at six per cent by the end of 2022 and extremely weak wage growth. That must surely be in part a function of the fact that the government will reduce real government expenditure by 17.5 per cent in 2021-22, the fiscal year starting in just seven months’ time. That is a record cut in government expenditure and will have an impact on the macroeconomy. The governor noted: 'Businesses are failing or they are going to fail. I think the insolvency rate at the moment is low but it is going to rise.'

The role of the House Economics Committee is to scrutinise the performance of the Reserve Bank in fulfilling its mandate. It is of concern to the committee that the Reserve Bank doesn't forecast hitting its inflation target in the foreseeable future. At the top of a chart from Westpac called 'G10 central bank balance sheet assets as a share of GDP' is the Bank of Japan, with around 35 per cent assets. At the bottom of the chart is the Reserve Bank of Australia, with a little less than five per cent assets. On that metric, quantitative easing in Australia has been more modest than it has been in the nine comparator jurisdictions with which we'd naturally compare ourselves. This is reflected in the change in the foreign exchange markets since the start of March, with the Australian dollar relatively overperforming and, therefore, losing the ability to stimulate the economy through the exchange rate channel.

That's the high-level picture. In terms of what more the Reserve Bank could do, we had productive conversations around their purchase of state bonds. State bonds are 30 per cent of bonds on issue, but as a share of the Reserve Bank's quantitative easing program they are only 20 per cent. Dr Debelle of the Reserve Bank responded to this by saying: 'When we buy Australian government bonds we're pulling down yields for everyone in the country.' But the contra-argument is that the state bond market is only a $400 billion market and one on which a big fish like the Reserve Bank could potentially have a larger impact than it could have on the Commonwealth bond market, which is more an international market. Driving down the prices of state bonds would have a material impact on the ability of state governments to fund much-needed fiscal stimulus.

I also offered the Reserve Bank a chance to respond to a comment from former researcher Peter Tulip, who said:

Our disagreements over the zero bound … reflect … that one side respects the research while the other side believes what it wants to believe.

Gertjan Vlieghe, from the Bank of England's Monetary Policy Committee said:

My own view is that the risk that negative rates end up being counterproductive to the aims of monetary policy is low.

The Reserve Bank remains cautious on this matter, despite the fact that other countries have moved.

The Reserve Bank's structure is also a matter which came up for some conversation during our recent hearings. Since 1989, every Reserve Bank governor, deputy governor and assistant governor appointment has been an internal one. Various critics have in recent times suggested that the Reserve Bank may have become a little too much of a closed shop. The ability of the Reserve Bank to draw in external ideas is important. The Reserve Bank did respond that they have a lot of robust internal conversations and that their current head of economic analysis was an outside appointment from the private sector and the IMF. But I remain concerned that the Reserve Bank has only made internal appointments at its three most senior levels since the 1980s.

According to the Warsh review of the Bank of England, the Reserve Bank is also the only major central bank not to have regular press conferences after meetings. I hope that the Reserve Bank will move away from that position. I was pleased when Governor Lowe held a press conference following the most recent monetary policy announcement. I think it would behove the governor to make that a regular factor.

Finally, more precision over forward guidance would also help ease the constraint implied by the lower bound. The Reserve Bank has said it won't raise rates until inflation gets within the band. To name a number rather than a band would potentially be productive.

The Reserve Bank and the Treasury are the places where many of Australia's best macroeconomists go. One of the impacts of that has been that Australian macroeconomic commentary has been less rigorous than in other areas, where many of the experts have jobs that allow them to participate fully in the public debate. That is, however, beginning to change, and I'm pleased that there is an active academic community engaged with questions of monetary policy. Thoughtful scholars, such as Isaac Gross from Monash; Stephen Kirchner from the University of Sydney; Bruce Preston from The University of Melbourne; Peter Tulip from the Centre for Independent Studies; Emma Dawson and Stephen Koukoulas from Per Capita; and Brendan Coates, Matt Cowgill and Danielle Wood from the Grattan Institute are among the many who have made important contributions to the academic debate over monetary policy and whose expertise is being drawn on by the Reserve Bank. It remains head-scratching to me that there is only one monetary policy expert on the Reserve Bank board. I think we would be far better served to have two or three monetary policy experts on that board.

In closing, I thank the chair for the way in which we have worked constructively together on the House Economics Committee this year. I acknowledge Stephen Boyd and Lachlan Wilson for their work as secretary of the committee, and Casey Mazzarella for her splendid work as the interim committee secretary.

ENDS

Authorised by Paul Erickson, ALP, Canberra.