SKY NEWS LIVE BUSINESS WEEKEND
SUNDAY, 10 OCTOBER 2021
SUBJECTS: Reserve Bank of Australia; house prices; interest rates
ROSS GREENWOOD, HOST: Andrew, thank you so much for your time. Those policy differences between Australia and New Zealand seem to justify your calls for this review into the Reserve Bank. Is that the way you see it?
ANDREW LEIGH, SHADOW ASSISTANT MINISTER FOR TREASURY AND CHARITIES: The Reserve Bank could benefit from a review. I don't think this is about beating up on the institution, but about making it better in the interest of all Australians. Inflation has been below the target band for most of the last five years, and the Reserve Bank's own forecasts have it being below that. I've been calling in the House Economics Committee for the Reserve Bank to do more to cut rates in the first instance, but now, with rates close to zero, it'd be appropriate for them to be also looking at whether they could do more in the quantitative easing space. One of the big debates, though, as you know, Ross, is over what's going on with global inflation. There's those who say that this is a permanent change, and others who say that it's more temporary. I'm pretty much in the temporary camp. I think the inflation we're seeing globally is largely a result of supply shortages around things such as microchips, and is unlikely to be baked in, so I think the Reserve Bank's certainly doing the right thing to keep rates on hold.
GREENWOOD: OK, so what is it that prompts you to call for that review of the Reserve Bank in the first place? What is it that potentially you see them being able to do differently to what they're doing today?
LEIGH: Well, periodically organisations should be reviewed to ensure that they're doing as good a job as they can. In the case of the Reserve Bank of Australia, it's less transparent than some of its peers - doesn't hold press conferences when it announces its decision, doesn't produce the minutes of the meeting showing the voting decisions that members make - and has a board which is largely made up of talented generalists rather than monetary policy experts. I think, given what we've seen in the inflation performance over recent years, it is appropriate to have a look at that. Across the ditch, the RBNZ has made a decision which is certainly unusual among central banks. Only the Norwegians and the Koreans are raising rates at the moment. Most other central banks are keeping rates on hold. There is an open question as to whether they're trying to use interest rates as a way of dealing with house prices in New Zealand, which if they were would probably run against most of the evidence suggesting that interest rates aren't the best way of keeping a lid on house prices.
GREENWOOD: OK, so I'll bring that up with you, because obviously the Council of Regulators, of which the Reserve Bank is one, has in the past week, through APRA, come out and indicated that they're going to effectively tap the brakes, as they called it, or increase, if you like, the amount of hurdles that a home borrower might have to leap to get into a new home in the future. Now, do you think that that approach is, shall I say, a 'go lightly' approach, as compared with the New Zealand approach, which as you point out, to quell inflation, to quell rising house prices, a rise in interest rate sends the strongest possible message to its community?
LEIGH: Economists have a thing called the Tinbergen rule, which is this simple idea that if you've only got one instrument, you can't try and do two things with it, so the Reserve Bank shouldn't be trying to use interest rates in order to both target inflation and unemployment, and then also trying to keep a lid on house prices. It's right to look at macroprudential measures, but the test for Labor will be whether they ensure that first home buyers are able to get a better shake of a stick. Lately, we're seeing a big rise in investor purchases crowding out first home buyers, and the rate at which house prices are rising, Ross, is well in excess of wages. The Government's own budget has real wages falling and yet we've got house prices going up about 20 per cent in the last year and forecast to have potentially double digit rises next year. The Government needs to be doing more on supply, as well. You would have seen in Anthony Albanese's budget reply a commitment to doing more on the supply front, creating a Housing Australia Future Fund which would then invest in more social and sustainable housing.
GREENWOOD: Just before we leave housing, the one thing you do know, though, is as soon as international borders open the Government itself is forecasting an increase in migration to Australia. That's only going to increase demand for housing, not take it away.
LEIGH: Yes, that's true, although migrants are also well represented in the housing construction sector as well. You want to take into account the benefits that they bring on both sides of the equation. Ross, we benefit as a country enormously from immigration. One of the constraints on growth during the pandemic has been the lack of migration. The challenge isn't to turn off the migration tap - it's to ensure that we're able to keep housing affordable and have a strong migration program. We of course did that in the post-war decades. Australia had a rising homeownership rate in the most rapid period of immigration, so it's not beyond the wit of smart policymakers to tackle both these issues.
GREENWOOD: Okay, let's go back to that policymaker, the Reserve Bank, because ultimately, right now, its charter says that it should strive for full employment, whatever that number is, but we don't exactly know what the number is. It seems to be a moving number from the Reserve Bank right now. It's also to create economic stability, we know that, and also to keep inflation in this band of between 2-3 per cent. Well, right now it appears we don't have full employment. That's something quite clearly that's been affected by the pandemic. We don't have inflation in its band. We do have, no doubt, stability in our banking and monetary system. So, you know, one out of three, I kind of guess, at the moment, is not so bad.
LEIGH: You make excellent points there, Ross, and I think it is important to remember that the natural rate of unemployment does tick down as you have more underemployment. Underemployment is people who'd like more hours, and there's an awful lot more underemployment than there was a couple of decades ago, which is why labour economist Jeff Borland has said that the NAIRU was probably a lower number now than it used to be. That places even more onus on the Reserve Bank to be ensuring that it's doing everything it can to support the economy, and of course it needs to be working in concert with the federal government. The withdrawal of fiscal support from the economy, which is what Scott Morrison and Josh Frydenberg have planned, is going to make the job harder for the Reserve Bank.
GREENWOOD: Okay, so then a final one: should, indeed, the Charter of the Reserve Bank not only be reviewed, but be changed into the future? They can't hit the inflation targets. The employment number is not specific. That's a fundamental problem. And, obviously, the stability of the economy is what everybody strives for.
LEIGH: Under an Albanese Labor government, we would have a review of the Reserve Bank that would look at all of those things, Ross. We do need to make sure the statement is appropriate for the times, and we need to make sure that we've got the very best people working in the Reserve Bank and with the Reserve Bank to ensure it meets its mandate. It's one of Australia's great institutions. Monetary policy independence has been absolutely critical to Australia's prosperity, but every organisation can do better. That's why under Labor we'll have a thoughtful review into the operations of the Reserve Bank.
GREENWOOD: Shadow Assistant Minister for Treasury Andrew Leigh, I appreciate your time here on the program today.
LEIGH: Always a pleasure, Ross. Thank you.
Authorised by Paul Erickson, ALP, Canberra