A change to the Reserve’s Bank approach to inflation targeting is an unlikely outcome of the RBA review, despite calls for a change, Moody’s Analytics said in a commentary on the upcoming review.
“Don’t expect Australia to lead the charge in overhauling the system. Australia would be unlikely to adopt a new model unless heavy hitters overseas changed first,” the report said.
The terms of reference for the review include an assessment of monetary policy arrangements, the RBA’s objectives, the interaction of monetary policy with fiscal and macroprudential policy, the RBA’s performance in meeting its objectives, its governance and its culture.
Moody’s is more positive about the prospect of a change to the RBA board composition, with more scrutiny of the background and expertise of those on the board likely, as well as questions about the potential conflict of having the Secretary of the Treasury on the board of an independent central bank.
Moody’s also expects there will be a requirement for greater transparency about board discussions. The minutes are presented with a unanimous voice, with no insight into the diversity of views.
It said the review may recommend a process like the US Federal Reserve’s dot plot, which records each Fed official’s projections for future rates.
Moody’s has also listed the four most contentious issues it believes should be covered in the review.
Inflation was too low before the pandemic. In the five years before the pandemic, inflation sat below the RBA’s target range of 2 to 3 per cent for all but two quarters.
“Critics believe the RBA overestimated the non-accelerating inflation rate of unemployment (NAIRU) and kept the cash rate higher than it needed,” Moody’s said.
“COVID-19 has shown that the unemployment rate can go much lower before prices spiral higher. It needs to be closer to 4 per cent than the previously estimated 5 per cent.”
The RBA was too accommodative through the pandemic. “The RBA threw the kitchen sink at COVID, saving countless jobs and business in the process.
“But as many have pointed out, those supports are contributing to some of the inflation we’re seeing today. The criticism is misguided because at the peak of the crisis the world became more uncertain by the hour.”
The board misled households. As recently as December, the RBA’s advice was that rates were unlikely to rise until 2024. Households are assumed to have acted on this advice when entering the property market.
The RBA should have acted earlier in fighting inflation. The RBA maintained the view that the increase in inflation was due to transitory factors for longer than other central banks, Moody’s said.
“We now know supply disruptions are proving hard to clear and although official data on wages are yet to show a meaningful life in that demand driver of inflation, surveys suggest it’s just around the corner.”