The failure of Reserve Bank independence

Central bank independence entrenches an unaccountable system that prioritizes financial sector gains while increasing unemployment and eroding real wages, writes Dr Bronwyn Kelly.

More than 30 years after its acceptance by mainstream economists and both progressive and conservative politicians, the validity and utility of central bank independence is now coming under increasing scrutiny.

And rightly so, because what does this independence actually do for Australians who need to earn money by working? How can our families help? Reserve Bank Do you react to the rise in prices by raising interest rates and fueling growth in unemployment? How does it help anyone if the bank implements an interest rate policy with the intention of putting people out of work just when it becomes more expensive to live?

Of course it doesn’t help. Hence the growing dissatisfaction among thoughtful economists with the regulation as a whole; For example, Here, Here, Here And Here.

So how did we get into this problem? In the mid-1990s, the Reserve Bank of Australia managed to eliminate the influence of democracy in its decisions by exploiting a loophole in the law. Reserve Bank Actwhich allowed him to make a publicity Statement on the Conduct of Monetary PolicyIt gives itself sole authority to set interest rates (or more accurately, the cash rate target).

At the time it was thought that this would free the bank from political interference in its decisions, and in fact politicians were happy to avoid the hatred that came with making decisions that voters never liked.

Those who want to park their money in interest-bearing deposits do not like the bank to set low interest rates. And people who want to pay their bills, buy a home, or run a small business don’t like it when the bank sets high interest rates. Naturally, politicians were willing to let the cash rate decision cup pass them by.

However, the Central Bank’s independence in interest rate decisions did not benefit anyone except the banking and financial sector, which preferred high interest rates because they made money from money. It did not help those who needed to make money from employment or production. For example, it didn’t help anyone who wanted to borrow money to start a small business. And it certainly didn’t help those who needed their wages to keep up with inflation.

Average annual real wage growth has tended to decline over the last 20 years, and average annual real wage growth over the last decade wage The increase was below the annual average increase. CPI. Between 2015 and 2025, average annual real wages fell by 0.3% (prices rose more than wages). And since Covid, average annual real wages have fallen by 1.1%; this decline does not take into account the real increase in house prices and mortgages (not measured in the CPI).

For most Australians the situation is much worse than governments and the Reserve Bank are prepared to admit.

It is therefore time to review the wisdom of Central Bank independence. It is really unwise, economically, politically and democratically, to leave interest rate decisions in the hands of the Central Bank, where there are clear conflicts of interest arising from its lack of independence from the financial and banking sector.

This is not to imply that the Reserve Bank of Australia is corrupt, but the potential for corruption in the current system, with its inherent tendency to favor the returns of the financial sector at the expense of overall economic stability and the public interest, is under-recognised.

Australians can protect themselves from this potential by reforming governance arrangements for macroeconomic policy and changing the way decisions on interest rates and government spending are made.

In order to protect against economic instability and price increases caused by the separation of decisions on interest rates from decisions on public expenditures and taxation, it should be considered urgent that the control of monetary policy be taken from the Central Bank and placed under a single board within the Treasury. This new board should be responsible for integrating decisions on fiscal and monetary policy. functional finance.

Although the workings of functional finance are not well known in today’s fashionable economic circles, it can easily be understood as a means of integrating macroeconomic decisions for the public good. More specifically, functional finance transforms our understanding of the best use of monetary and fiscal policy tools. It envisages that monetary policy should be used to encourage investments, not to control prices. And it demonstrates the versatility of fiscal policy to the extent that it can easily be used to control inflation without causing unemployment.

In other words, functional finance recognizes the fact that monetary policy does not and cannot control prices but can stimulate investment. It also recognizes the fact that fiscal policy, not monetary policy, is the best way to control inflation.

This offers Australians the opportunity to stabilize their economy and achieve price stability without relying on increases in unemployment and declines in real wages. This means Treasury staff must relearn what was previously well known. Keynesian economics It strongly influenced economic decisions after the Second World War and before neoliberals succeeded in displacing fiscal policy from its primary place in macroeconomic management arrangements, that is, before neoliberal economists cooked up a decision system that gave an unelected body free rein to create unemployment and high costs of living.

If we want full employment at stable prices, we cannot rely on central banks that cannot be held accountable in a democracy. The government must take back the reins on our behalf and use fiscal and monetary instruments for the purposes to which each is best suited; They should be aware that they cannot stabilize neither the economy nor the prices with a dispersed fiscal and monetary policy system.

This is not a difficult task; In fact, everything would be easier for everyone. The first easy thing the Treasury can do is replace the current 2-3 per cent inflation target range with a 2-3 per cent cash rate target range. Since there is no relationship between interest rate decisions and inflation (cash rates do not control inflation), day-to-day decisions on the cash rate should instead aim to attract investors, especially in small businesses that offer employment opportunities close to home for existing workers.

No doubt banks and mainstream economists will throw up their hands and cry no to this proposal. But surprisingly, mainstream economists have failed to question the logic of monetary policy and its usefulness in stabilizing prices. It is surprising because it is clear that when the Central Bank raises interest rates, it does not control prices, it increases them. Increases in interest rates affect every aspect of the cost of living, not just mortgage holders.

Therefore, it is clearly wrong to unquestioningly maintain the status quo, especially since the unhindered and unbalanced implementation of monetary policy is based on ensuring price stability by leaving people unemployed. Every time the Central Bank desires another 1 percent increase in unemployment, the Monetary Policy Committee tries to put approximately 140,000 more people out of work.

This is the madness and cruelty inherent in “independent” decisions on interest rates. It is time to start using macroeconomic policy tools to create full employment and price stability, not to fuel unemployment and price increases.

Learn more about how we can reform macroeconomic policy and governance in ‘Public Interest Economics: a path to prosperity, security and sustainable consumption in a democratized Australian economy’ Written by Bronwyn Kelly, Founder of Australian Community Future Planning (ACFP).

For information on functional finance, see the ACFP Fact Sheet, Quotes from Public Interest Economics.

Dr Bronwyn Kelly is the Founder of Australian Community Future Planning (ACFP). He specializes in long-term integrated planning for Australia’s society, environment, economy and democracy, and governance systems for nation states.

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