Mentions Reserve Bank of Australia (RBA)

Splendid overview of RBA counter-productivity from my friend and colleague Martha:

In November 2024, The Reserve Bank Act was ammended. The changes now required the RBA’s monetary policy board to determine the monetary policy of the bank to stabilise prices in Australia, to maintain full employment in Australia and stabilise Australia’s financial system.  The Reserve Bank’s role was to prevent banks from destabilising the financial system to prevent credit crashes. The Statement on the Conduct of Monetary Policy-Reserve Bank was an agreement between the Treasurer Jim Chalmers and the Reserve Bank Board on the 10th July 2025. The agreement provided full operational autonomy to the RBA’s Monetary Policy Board, underlining the RBA’s goals of price and inflation control.

Somehow the ‘economic prosperity and welfare of all Australians’, got swapped out for keeping the banking sector stable. Now whilst the concepts might be related, stabilisation of Australia’s financial system is no guarantee of either economic prosperity or welfare for all the people of Australia. The RBA has also completely reinterpreted the term ‘full employment.’

Specifically the RBA’s statement of monetary policy explains ‘to achieve its statutory objectives, the Bank sets monetary policy to keep inflation in the economy to 2%-3%, and employment at the desired level that is consistent with maintaining low and stable inflation. In other words, there always has to be a level of ‘natural’ unemployment to avoid inflation.  Dr Kelly notes that even when inflation is within the RBA’s desired target range of 2-3%, the RBA does nothing to stop unemployment rising by lowering interest rates.

(Thanks for the name check, Martha.)

Governor Michelle Bullock has admitted that the RBA is basing its actions on the expectations of inflation, rather than direct observation of inflation. The RBA relies on the NAIRU (the non accelerating inflation rate of unemployment). The NAIRU cannot be directly observed or measured, it can only be inferred. My colleague, economist Katy Swain, hilariously calls the NAIRU, the RBA’s ‘invisible friend.’

Way back in the late 1990s, more than a quarter of a century ago, the consumer price index (CPI) used to actually reflect the cost of living. It included all of the big costs incurred by households, including – importantly – mortgage interest payments. At the time, mortgages accounted for an average of $5 of every $100 each wage earner spent.

Then in September 1998, in response to representations from the Reserve Bank and the Treasury, the bureau changed the way it calculated the index. It excluded mortgage and other interest payments, in a decision it acknowledged would make the index worse at measuring living costs.

[…]

While the consumer price index (the one quoted by the treasurer) increased 5.4% in the year to September, the living cost index for households headed by wage earners climbed 9%.

For these working households, the price of food climbed 4.8% in the year to September, the price of electricity 14.5% and the price of mortgage interest charges 68%.

It’s the increases in mortgage rates that have made the increases in the other prices hurt so much.

The overall increase in prices faced by wage-earners – 9% – is way above the typical wage increase of 4%.

Bill Mitchell of the University of Newcastle points out that on this measure, the correct one, the buying power of wages has been falling for two and a half years. He says it puts the treasurer’s comments in a wholly different light.

Rents have rocketed and property prices are hot, but the Reserve Bank of Australia (RBA) has changed the way it looks at the market and a key analysis panel that examines housing issues has not met for more than a year.

The Housing Market Discussion Group brought together internal experts to share insights on household budgets, the lending markets and the stability of our financial system.

It hasn't met since September 8 2022.

Documents sought through the Freedom of Information (FOI) process reveal the most recent meeting of the group — also known as the Domestic Housing Community Meeting — was one day after the central bank hiked interest rates for a fifth time.