Photo by eskay lim on Unsplash
By Mark Kenny
A version of this article was originally published by The Canberra Times.
Australia's hands-off method for setting monetary policy relies, solely, on the wisdom and independence of the Reserve Bank.
Much like our courts, the central bank's autonomy lifts its Monetary Policy Board above the fray of popularity or politics.
Despite the dire implications for borrowers, businesses and savers, its rulings bespeak expertise, resolve, even infallibility.
Unlike our courts, the board's unicameral structure and opaque deliberations offer those on the losing end of decisions, no appellate tribunal.
We don't learn what was argued in meetings nor who voted for and against a given cash rate decision.
That is a problem. Or rather, it covers a cluster of problems. For a start, it obscures the weighting placed on fragmentary, iterative ABS data (some of which actually gets revised in subsequent quarters), human subjectivity, sectoral and political loyalties among board members, and incompetence.
It also encourages something else arising from unscrutinised power - a sense, internally, that the central bank alone, is uniquely placed to make prognostications about future economic conditions.
You and I might read that as an absence of humility - or worse, arrogance.
This is not a new failing. Thirty-five years ago, it was a factor in "the recession we had to have".
Back then, some borrowers were protected from peak rates of 17.5-plus per cent because the Reserve Bank had only recently been handed responsibility for setting monetary policy. Longer-standing mortgage loans were thus capped at 13 per cent.
Still, the ramifications of such punishing conditions were widespread, and economists are still divided on whether it was the central bank itself which worsened, if not fomented, that recession.
Some argue that the credit-fuelled asset price-bubble of the late 1980s was always going to bring a reckoning and that the 1990-91 recession would have lasted longer had the central bank not been so muscular.
Others, like Australia Institute co-director Richard Dennis, view the bank's insensitivity to the lasting on-ground consequences more harshly, calling its approach "the most devastating mistake in public policy in recent times".
Dr Dennis says central banks aren't configured for crises and may overreact because they have only one lever and tend to pull it, even if waiting would be better.
"All central banks are good at driving on long straight roads ... but because it's the turns that matter, they struggle because, largely, they're driving via the rear-view mirror," he tells me in a reference to the historical data on which they rely.
"Nobody knows what is going to happen in the future and pretending things are certain when they're anything but, brings its own risks."
Either way, that 1990-91 recession was a scarring and formative period.
Subsequent economic ministers, such as Wayne Swan and Kevin Rudd, had lived through it and saw firsthand the horrors of home loan foreclosures, bankruptcies, and what became structural unemployment with withering intergenerational consequences.
This explained their determination to avoid a repeat in the GFC of 2007-09. Treasury too, with the then secretary Ken Henry's famous entreaty to the pair to undertake stimulus spending: "Go early, go hard, and go to households".
In Australia, we called it the Global Financial Crisis - emphasising its exogenous causes - but in the northern hemisphere it was known as the Great Recession, because it was.
That Australia circumnavigated a global meltdown which brought so many comparable economies low was a triumph of front-footed governing.
Swan frequently claimed that the Reserve Bank and the government (monetary and fiscal policy) were working hand in glove to vouchsafe the economy.
Can you say the same now when the government is trying to improve housing affordability and the bank is making it more exclusive?
In recent years, the RBA has made errors from which it is allowed to retreat without much heat.
During the pandemic, it cut the cash rate to record lows to assist the economy. By November 2020 it was just 0.10 per cent where it stayed until well into 2022. That was probably too long but it was nowhere near the bizarre forward indication from RBA Governor in May 2021 that it would sit pat for another three years - ie until 2024. That quasi-commitment had to be junked as pent-up demand spiked in the post-COVID recovery. In fact there'd been 13 hikes - some of them double increases - by 2024.
Last week's call to increase the official cash rate to 4.35 per cent in order to cool an economy already experiencing parlous growth, may well be another error. There is little doubt it will prove ruinous for businesses and home-buyers - especially anyone who bought into a roaring market and will now be stretched further.
Government opponents insist the bank is intervening to tame inflation that was already rising before Trump's unilateral Iran war due to excessive government spending.
If so, it only underscores the weirdness of dialling in three cuts last year before suddenly reversing course to order three rises already this year. Surely the bank is meant to "look through" temporary, volatile and non-structural price spikes - even where there are secondary price effects?
At 4.35 per cent, we're right back to where the bank's loosening stance began in 2025. This may be the most egregious (make that humbling) backflip in Australia's monetary policy history.
But who's counting?
Mark Kenny is the Director of the ANU Australian Studies Institute and host of the Democracy Sausage podcast.