MNI: RBA's Lowe Calls For Monetary And Fiscal Alignment

The outgoing Reserve Bank of Australia Governor Philip Lowe has called for greater coordination between monetary and fiscal policy, noting better outcomes were possible if the two were well-aligned

Speaking at an industry lunch Thursday in Sydney, Lowe noted monetary policy was a powerful, yet limited, instrument. “In principle, fiscal policy could provide a stronger helping hand, although this would require some rethinking of the existing policy architecture,” he noted. “In particular, it would require making some fiscal instruments more nimble, strengthening the semi-automatic stabilisers and giving an independent body limited control over some fiscal instruments. Moving in this direction is not straightforward, but some innovative thinking could help us get to a better place.”

During his tenor, Lowe noted monetary and fiscal policy had worked closely together at times. "At other times, it would be an exaggeration to say this was the case," he said, adding the coordination was most effective during the pandemic. "During that period, fiscal policy was nimble and the political constraints on its use for stabilisation purposes faded away. And we saw just how powerful it can be when the government and RBA work very closely together. There are some broader lessons here and I was disappointed that the recent RBA Review did not explore them in more depth."

MNI reported this week calls by a former RBA board member for greater coordination between fiscal, monetary and macroprudential policy. (See MNI INTERVIEW: RBA Needs Prudential Tools, More Fiscal Sight)

Lowe also called for a lift in productivity and pointed to the link between monetary policy, credit and asset prices. "It is worth recalling that prior to the pandemic, economic cycles were increasingly being driven by developments on the financial side of the economy – that is, by swings in credit and asset prices," he said. "My view has long been that central banks shouldn’t target credit growth or asset prices, but neither can they ignore them. Interest rates directly influence how much people want to borrow and the value of assets. This means that central banks can’t wash our hands of what is happening on the financial side and we need to work closely with the prudential authorities to contain the build-up of financial and macroeconomic risk."

The RBA Review called for the central bank and Australian Prudential Regulatory Authority to formalise cooperation arrangements on financial stability policy. Lowe in July revealed the Reserve would sign a new memorandum of understanding with the Council of Financial Regulators and APRA, but details were not disclosed (See MNI: RBA's Macroprudential Change Seen Impacting Rates).

The RBA will begin implementing the review’s recommendations next year, led by incoming Governor Michele Bullock.