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Curbing inflation measures, rising interest rates and central bank ‘secrecy’ were just some issues raised and suggested to the Reserve Bank of Australia (RBA) on Thursday’s (10 November) by the Senate Economics Legislation Committee (Budget Estimates), in Canberra.
Fronting the questions were Ms Michele Bullock, RBA deputy governor and Mr Christopher Kent, assistant governor (Financial Markets), who gave answers to senators’, at times, intense and in-depth questions.
With inflation expected to peak by year’s end at 8 per cent and the RBA target range ideally 2 to 3 per cent, the deputy governor was adamant: “We need to make sure that we’re keeping interest rates high and possibly increasing them to make sure that people understand that we will do what it takes,” she said.
Tasmanian senator Nick McKim AG sought clarification that RBA governor Mr Philip Lowe issued "forward guidance”, and that “it's a statement designed to be reported, so as to encourage people to borrow more money and, in particular in this circumstance, to borrow more money to pay for housing.
“That's true, isn’t it?” Mr McKim asked.
Ms Bullock replied: “Forward guidance is about trying to provide information not just to households and businesses, but also to financial markets because the forward guidance also assists to bring down funding costs by bringing down the cost of funding for banks.
“So it's not just about encouraging individuals, it's also about bringing down the structure of interest rates in the economy.
Senator Nick McKim pressed for agreement that forward guidance was designed at least in part to encourage people to borrow [more money].
The RBA deputy governor replied: “I would say it wasn't explicitly designed to do that. It was designed to support our other policies … which was all about trying to bring down the structure of interest rates.”
Asked how inducing people to take on higher levels of debt than they otherwise would could ensure the economic prosperity and welfare of the nation, Ms Bullock replied: “Well, people make decisions about whether to borrow and lend and businesses make the same sorts of decisions.
“So businesses [make] decisions about whether or not to invest and what we were trying to do through this pandemic, [in] bringing down the structure of interest rates, was to provide [cheap] funding or funding for households and businesses to increase the demand, to support their demand, in a period when, quite frankly, demand was flat. So this is was what the whole purpose was.”
Senator McKim asked if the RBA board accepted that its decision to increase interest rates earlier than it had forecast] would be most affecting people on the lowest incomes with the lowest levels of wealth to fall back on.
Ms Bullock replied: “I think we would accept that interest rate rises impact those who have mortgages and [are] lower income, and that's about 30 per cent of the population.
“So, yes, of the people that have mortgages I think we would accept that those are incomes that were impacted.
“But it's also true that there's another chunk of the population who don't have mortgages at all. And in fact, they are not impacted by those interest rates and many of them are on lower incomes still, so it's not as clean cut as [it seems].”
Australian borrowers ‘copping it on the chin’
Queensland senator Gerard Rennick questioned how much money banks had made in times of low interest rates, and whether now might be a time to pay the Australian public back.
“Basically [it’s] a free gift to the banks then on behalf of the Australian taxpayer,” he described, referring to the RBA’s term funding facility and profits from interest made.
Mr Kent explained: “That money could be lent by banks or used by banks for a whole range of purposes. So some [of] it might have found its way to fixed-rate loans.”
Senator Rennick posed the question: “So they [banks] are getting about 3 per cent margin on that … basically a free gift to the banks [then] on behalf of the Australian taxpayer.”
Mr Kent outlined it is a “subsidy” because it was put in place, as the deputy governor had earlier suggested, during those "dire times" (March 2020), when the intention was to provide low-cost funding, and much of that low-cost funding was passed on to borrowers, including households but also small businesses, in the form of low-rate loans.”
“I suspect much of it was lent out, and earning high returns for banks,” Mr Kent stated.
Senator Rennick replied: “That’s something I think that banks should - actually, might - be made [to be] repaid because obviously now … hardworking Australians are copping it on the chin, in regard to their home loans.
“I’ll leave that as a statement,” the Senator said.
Proper standards of transparency
Senator Gerard Rennick also reminded the RBA of his pursuit for correspondence between the RBA and the International Bank of Settlements, on behalf of the Australian public, for transparency – and why it was refused.
Ms Bullock explained the response was due to the information being “voluminous” and “confidential” as it was inter-central bank communication, and the RBA needed to remain included.
“Those conversations are had on the condition that they are kept confidential,” she explained.
“And that's my concern because central banks aren’t being held to proper standards of transparency and accountability,” Senator Rennick retorted.
“I think the RBA should be accountable to the parliament.
“Central banks shouldn't be keeping conversations to themselves.”
[Related: 2.85% November cash rate announced]
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