RBA ‘transparency and accountability’ are ‘paramount’: Report

In recapping a range of issues and responses from the Reserve Bank of Australia (RBA) during the past year, the latest house standing committee on economics report has reminded the central bank to “closely examine lessons learnt” because “Australian households, workers and industries deserve nothing less,” the scrutineer has explained.

While a fully independent RBA review is due in March 2023, the government’s standing committee report — titled Review of the Reserve Bank of Australia Annual Report 2021 — acknowledged many positives, but ultimately focussed on matters arising from the central bank’s public hearing in September 2022.

Committee chair, Dr Daniel Mulino MP, said: “The committee’s regular scrutiny of the RBA occurred at an unprecedented time.

“The domestic and global environment had changed rapidly since the last hearing in February. International pressures, including the war in Ukraine, a recovery in local demand as we came out of pandemic lockdowns, and supply side constraints all combined to push inflation to its highest rate since 1990.”

In giving context to the results, the committee said it appreciated that several factors influencing inflation “could not have been foreseen”.

During the hearing, the committee scrutinised the RBA’s approach to monetary policy, including the inflation target; forward guidance on interest rate movements; and the path to bringing inflation down within the target range over time.

“Transparency and accountability in the RBA’s monetary policy decision-making are paramount, and the committee will continue to scrutinise the RBA’s policy responses to current and emerging threats to the economy,” Dr Mulino said.

“The committee also expects the RBA to closely examine lessons learnt from its approach to forecasting and the way it communicated this. Australian households, workers and industries deserve nothing less.”

The committee examined statements from the central bank over a range of issues, including the interaction between fiscal and monetary policy; climate change; housing affordability; productivity; and the labour market.

Extra pressure on mortgage holders

Since the last hearing in February 2022, the standing committee acknowledged that the “environment has changed rapidly, with the Australian economy now battling inflation levels not seen in a generation, due to a combination of domestic and global factors.”

“The committee appreciates that several factors influencing inflation could not have been foreseen,” it stated.

However, it did re-examine the RBA’s stance on counter-inflationary levers and the impact it was having on mortgage holders. The RBA told the committee that in the case of owner-occupiers, “the situation is nuanced”.

“Changes to mortgage interest payments relative to income were ‘quite an important consideration’ in its [RBA’s] decision-making process. However, to address the current high inflationary environment, rate rises could not be avoided” he said.

Citing RBA governor Philip Lowe, it documented his words: “I’ve said this before: it’s very difficult for people, but — this is the point — it will be even more difficult if inflation stays high. If you’ve got a mortgage, you don’t like higher interest rates — we understand that — and it hurts.”

The committee heard, as the RBA expanded on the ‘very uneven’ distributional impacts of interest rate rises on mortgage holders, that: “At the worst-affected end of the spectrum, the RBA’s forward-looking analysis suggests that approximately 15 per cent of borrowers would not have any spare cash flow by the end of 2023 due to rate rises and increases to the cost of living.

Conversely, it heard there is another cohort of borrowers who are “unlikely to experience stress in their mortgage repayments.”

These are the households that had accumulated savings during the pandemic — at the aggregate level household savings expanded markedly at that time — and now have the ability to draw down on those savings as rates rise, it outlined.

Additionally, the RBA outlined that around one-third of borrowers, both on a fixed or variable rate, ‘are not going to have any increase to their actual realised payments out to the end of next year’, the report noted.

The choices we make collectively

The committee also sought the RBA’s view on increasing housing supply in the long-term to support financial stability and to enable households to adapt to changing monetary policy — noting that one of the biggest impacts of an increase in interest rates is on housing affordability.

In response, Mr Lowe emphasised that while ‘cyclical variation’ in housing prices is driven by interest rates and therefore the RBA, the high cost of purchasing a home in Australia stems from ‘structural factors’.

These are the preferences of Australians about where they want to live, the investments made in transportation and urban design, the taxation system, and the availability of mortgage finance.

The governor continued that: “Interest rates influence the cycle, but not structurally. We’ve seen in countries — parts of the US are a good example — where interest rates have been lower than they were here, but housing prices are much lower because, as a society, they’ve made different choices about where they live, investment in transport and taxation. It’s the choices we’ve made as a people that have given us high housing prices, even though the interest rate influences the cycle.

“The central bank can’t do anything about that.

“As an individual, not as the central bank, I think it would be better if we’d make different choices to give a lower average level of housing prices that would give people more opportunity and people would need to borrow less.

“So everything we [RBA] have done — if you ask what choices a society could make to give high housing prices — we have made them all.

“Not to say it’s good or bad, but that’s what we’ve done.”

 [Related: Financial bodies call for ‘dual board’ in RBA reform]