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MNI INSIGHT: RBA Review Call After Internal Proposals Rejected

MNI (Sydney)
SYDNEY (MNI)

The RBA was already on the defensive thanks to surging house prices before an OECD call for a policy review.

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News that Treasurer Josh Frydenberg will consider following the OECD's advice to review the Reserve Bank of Australia's policy framework will be received coolly at the RBA, which has already conducted several internal reviews of its own, MNI understands.

So far the RBA has rejected some of the more sweeping policy recommendations produced by these internal reviews, such as to add growth in gross domestic product as a target, in addition to inflation.

While the results of any review requested by the federal government would have to be considered carefully, the conclusion at the RBA from watching similar exercises at the Bank of Canada and the European Central Bank is that they have moved these banks closer to Australia's existing monetary policy framework, which has been driven by inflation targeting since the early 1990s.

In its 2021 economic survey of Australia, the OECD noted the RBA's failure to raise underlying inflation to within its 2-3% symmetric medium-term target band for over five years, and also pointed to what it called an active public debate about the RBA's policy and practices. It cited a parliamentary review of the RBA's 2019 report, which dwelt on the central bank's struggles to meet its target.

ON THE DEFENSIVE

After having decided to extend quantitative easing, and pushing back against any speculation of an early rate rise, the RBA has also found itself on the defensive towards those concerned by surging house prices. But in a speech on Sept. 14, RBA Governor Philip Lowe said it was the government's job to address planning rules, and taxation and social security system incentives pushing house prices higher. The RBA's role was to achieve its inflation target and support the return to full employment, objectives, Lowe insisted, that the central bank was on its way to achieving.

In its report released this week, the OECD recommended a broad review of the RBA's mandate, policy tools, communications and organisational structure, and suggested that such reviews should be done on a regular basis. In response, Treasurer Frydenberg told Sky News television that he would consider a review of the RBA, "in terms of looking at the RBA, looking at the monetary policy settings and learning from the experience through the pandemic."

"The RBA has performed very well through this crisis, its policy response has been in sync and coordinated with the government's fiscal response," Frydenberg said.

The opposition Labor Party called for a review of the RBA earlier this year, but provided few details on how it would implement this if it wins an election due in 2022.