Why the demolition job on the RBA should be considered carefully
With politicians, the media, and market commentators attempting a demolition job on the Reserve Bank of Australia (RBA) calling for an overhaul, it is important to step back and not get caught in the hype. Don’t get me wrong. Governor Lowe has said a couple of unfortunate things recently. But no one is perfect, and it certainly isn’t a reason to tear down the house that we have happily lived in for decades.
Part of the RBA’s role is to make what might be unpopular choices for the long-term benefit of the Australian economy. The RBA’s “hard choices” over the last 15 years have been ones that have benefited businesses and increased asset prices. So they have been popular ones, and not exactly hard. Those with the loudest voices (business leaders, fund managers, property-heavy baby boomers and politicians) were fine with the RBA’s policy because it was in their self-interest.
Now those with the loudest voices can't gorge on that sweet free money and asset prices might not rise forever, all of a sudden they have concerns over how the RBA operates. Convenient. Here are some things to consider before we join the mob in tearing down the RBA.
Higher rates and/or inflation have been coming for years.
This “world of pain” that is supposedly being sprung on us by the RBA has been coming for years. But in typical fashion, we didn’t want the party to end.
If anything, my criticism is that the RBA has already been letting the influences of self-interest in too much over the last decade. The mistake was not normalising monetary policy back to historical levels sooner, with our household debt to GDP ratio one of the worst in the world. The RBA was in the process of doing so before the pandemic derailed the world economy.
It has been a wild three years for the World Economy.
COVID-19 meant we had to return to looser monetary policy along with the Government's intense fiscal stimulus, leading to a far quicker-than-expected recovery, all in two years. Central banks did not have the luxury of waiting to see the data because things moved so quickly. Then enter Russia to disrupt the supply chains yet again and boom, inflation. What the world has been through since March 2020 is certainly unprecedented and economic numbers have been nightmarish to digest, let alone predict for the best of central bank economists.
The housing market isn’t the economy.
Yes, the RBA misjudged the situation. Unfortunately, Governor Lowe publicly said something you shouldn’t say to a nation with one of the highest debt-to-GDP ratios in the world, no encouragement was needed for Australians to buy more property. However, the RBA aren’t the only ones with their hands on the steering wheel here.
APRA’s 2.7% buffer was conservative at best with the average hiking cycle around 4% in the last 40 years and coming from “emergency interest rate levels” It’s not a big leap to think the RBA would raise rates beyond APRA’s 2.7% buffer. The RBA’s mandate is to control inflation and not manage the housing market.
Independence is by design.
There has been a lot of criticism recently that the RBA is too insular, that it lacks outside experience, and that it is resistant to outside influence. I argue that’s the way it was purposely set up to operate. I believe that inviting politicians, business leaders, investment bankers, and the Big Four into the RBA would be the equivalent of letting the lunatics run the asylum. Here is why I believe that’s the case.
Politicians: Politicising monetary policy was the reason rules around the central bank's independence were drawn up. Currently, our politicians are conveniently using the RBA governor's unfortunate recent gaffes to undermine the RBA, all the while making the central bank’s job harder by pushing populist policies that provide fiscal stimulus. This is Politics 101 and distraction at its best. Listening to the RBA and formulating policy around their recommendations would be a smart idea. However, this hasn’t happened in years. Instead, the government is playing the part of an absentee dad who turns up once a year with gifts while the RBA has to do all the economic parenting.
Business leaders: While some experience on a consulting level might be helpful here, they are highly unlikely to be impartial. Endless profit growth is the only thing that satisfies shareholders and life is a lot easier when the economy is flooded with cash.
Investment bankers: They may have the financial markets knowledge but how did that pan out in 2007-2011? We saw bankers coach Greece on how to scrape into the European Union before effectively inserting a time bomb into the financial system. This doesn’t even mention their self-interest in low rates continuing so those M&A deals, SPAC-fuelled IPOs, and outperformance fees keep rolling in due to a QE-fuelled rally.
The Big Four Banks: All the big banks have business models geared only to expansions in credit. They have been slow to adapt technology, innovation, or diversify. Now, those short-sighted management failures will come home to roost as credit contracts. This has nothing to do with the RBA. Surely, one of the hundreds of economists internally at the banks knew that free money can't last forever. Surely, one of them raised a red flag around borrowing capacities after a 20% rise in the capital cities’ housing prices over the course of a single year. But no, it's just easier to blame the RBA.
Looking at the current state of play, Australia doesn’t sit too badly. We have good GDP growth, retail sales, low unemployment and one of the lowest cash rates. Rate hikes are warranted to normalise the economy before we create a bubble and the pace of the cycle has not been at the breakneck speed of the US, Canada and New Zealand. We might be in for some short-term pain, but we are doing ok both historically and against our peers
While the current witch hunt plays well to the geared masses, we mustn’t lose sight of the need for our central bank to remain independent, so they can continue to make the hard choices (the painful ones) that will leave us better off in the long run. This process should be free from being politicised and bullied by parties who don’t have ALL Australians' interests in mind.
I admit, a tightening of guidelines in communication from the RBA, both in regard to jawboning and “behind closed doors” meetings is needed but this is no more than a renovation, not a demolition job.
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Mark is the Head of Trading with Maqro Wealth bringing more than 25 years of experience in fixed-income and equities trading. He is focused on portfolio management for SMSF and Family Office clients, Mark oversees Maqro's portfolio positioning and...
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