RBA review could look for ways to avoid next crisis

As Australia plans its economic recovery from the pandemic, public attention naturally focuses on politicians, but this week the Herald also felt it was equally important to highlight the policies of the Reserve Bank of Australia.

As we reported on Tuesday, the fictitious treasurer Jim Chalmers has joined a growing group of influential economists who have called for a review of the bank’s operations in light of its inability to perform its primary function of keeping inflation between 2 and 3 percent a year.

The target range is enshrined in an agreement between the RBA and the federal treasurer, but the current governor, Philip Lowe, has not met this key performance indicator.

Consumer price inflation fell below 2% in 2014 and has only climbed back into the target range a few times since.

While low inflation has certain advantages for those who live on savings, when inflation is too close to zero, workers cannot ask for a raise in wages and the economy cannot grow. Critics say the RBA should have cut interest rates much sooner to revive growth. Had he done so, unemployment would have been lower before the pandemic.

The RBA is basically admitting that it has kept rates high for too long and tried to explain where it went wrong. She was overly concerned about the risk of low interest rates triggering a house price bubble and she failed to detect changes in the labor market and the global economy, which reduced capacity workers to push for inflationary wage increases.

Some have even called on the RBA board to resign over the issue, but that would be an overreaction. First, the RBA is in the same boat as most of the other central banks in the Western world who have struggled to raise inflation for similar reasons. Second, despite the miscalculation, the Australian economy has continued to grow, albeit slowly.

Regardless of the criticism of the RBA’s actions before the pandemic, the central bank has drastically changed its policies since then. He is now determined to explode inflation within the target range and beyond.

He pledged to keep interest rates close to zero until 2024, pushing unemployment well below 4% and annual wage increases of 3%.

He will ignore the risk of a real estate bubble, leaving it to the Australian Prudential Regulation Authority to soften the market using other levers such as setting minimum deposits and limiting lending to investors.

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