RBA’s structural challenge

There are still a few weeks before the RBA makes its next decision on interest rates, which means there is still time for the Australian Workers Union and the Australian Chamber of Commerce and Industry to organise a joint march on Martin Place, calling on Glenn Stevens and his board to cut rates.

Can’t you just picture it? Union member and employer, arm in arm, striding down the street chanting “What do we want? A rate cut! When do we want it? Now!”.

Okay, maybe the joint march is going a bit far, but there is no doubt that AWU leader Paul Howes and ACCI head Peter Anderson are very much singing from the same hymn sheet in their calls for the RBA to cut rates and restore confidence.

“The time has come for Australia’s central bank to move decisively to cut rates by a full half a percent, and for the retail banks to immediately pass it on,” Anderson said yesterday.

Howes has gone even further, floating the idea that the Government should re-examine the RBA’s charter with the idea of ensuring the central bank does more to protect Australian industry, rather than making the fight against inflation its main focus. Howes wants rate cuts, and fast, to get Australia’s currency down and give some more shelter to struggling manufacturers, where his members are employed.

Not surprisingly, suggestions that the RBA’s charter should be changed – or even debated – have been shot down by everyone from academics and economists to Finance Minister Penny Wong and Climate Change Minister Greg Combet.

“The Reserve Bank has done a better job than any other central bank in the world. To tinker with it now and to argue as Paul Howes does that there’s something wrong with the process just shows how out of touch he is with economics,” former RBA board member and Australian National University professor Warwick McKibbon said yesterday.

McKibbon makes a pretty good point – it is hard to argue that RBA’s steering of monetary policy during the GFC was anything other than skillful.

Putting aside Howes’ knowledge of economics, he has raised an interesting point about how the RBA will tackle the challenge of structural change.

It’s something the central bank is clearly watching, Stevens mentioned in his statement following the April rates decision.

“In Australia, growth in domestic demand ran at its fastest for four years in 2011, driven by private spending. Nonetheless the balance of recent information suggests that output growth was somewhat below trend over the year. There are differences in performance between sectors, and considerable structural change is occurring.”

RBA deputy governor Philip Lowe, who last month gave a fascinating speech on the implications for monetary policy from structural change, was upfront about the fact that the RBA can do “little to affect these forces” that are driving structural change.

The RBA’s only real weapon is interest rates, and it’s a blunt instrument. The RBA cannot set rates at different levels for different sectors of the economy. Its best strategy, as Lowe said in his speech, is to keep its focus on inflation and prevent this from adding to the list of economic problems these changing sectors are facing.

“Monetary policy can help the adjustment by keeping inflation under control and maintaining stability in the overall economy.”

Lowe’s speech suggests Howes and Anderson aren’t going to get much help from the RBA as they try to help their respective membership bases through this period of structural change.

But somehow, I doubt that will end the pressure on the RBA to do more.


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