The Albanese government is about to free the Reserve Bank of Australia from a rarely used constraint allowing a Treasurer to override a decision of the central bank, such as a policy to push interest-rates so high they cause a severe recession.
The Treasury has no such freedom. Nor should it. It can’t slash taxes or increase spending, or vice versa, without the Treasurer first endorsing these actions. These are budget decisions that have to pass parliament before they become a reality.
However, the Labor Treasurer Jim Chalmers has embraced a fundamentally anti-democratic measure which will mean the RBA is no longer responsible to the elected government on key decisions. Yet it will remain an integral part of economic policy making, despite it having no democratic oversight.
At present, the 1959 Act underpinning the RBA gives the government a form of “reserve powers” presumed to be confined to extreme circumstances. The Act sets out a complex process about what must happen if the Treasurer and the Bank are unable to reach agreement. The RBA has to give the Treasurer a statement about the difference of opinion. The Treasurer can then decide on the policy the Bank must adopt following an order he arranged for the governor general to issue on the advice of the executive council. The Treasurer then has 15 sitting days to give each house of parliament a copy of the policy order and other documents.
A separate section of the Act sets out the Board’s obligations or “charter”:
“It is the duty of the Reserve Bank Board, within the limits of its powers, to ensure that the monetary and banking policy of the bank is directed to the greatest advantage of the people of Australia, and that the powers of the bank…[are] exercised in such a manner, as in the opinion of the Reserve Bank Board, will best contribute to:
(a) The stability of the currency;
(b) The maintenance of full employment; and
(c) The economic prosperity and welfare of the people of Australia.
This is a long way from how many financial commentators see the RBA’s role solely as controlling inflation via interest rates. In the past, not all board members have seen its role in such narrow terms. Nor are there any grounds for believing the authors of the Act intended items (b) and (c) to be ignored.
After the Commonwealth Bank was established in 1912 it slowly adopted some central banking activities and other controls over the banking system. In 1945, new legislation formalised its powers over monetary and banking policy as well as the ability to impose exchange controls. It had the power to ration the level of credit issued by the banks, sometimes leading to a “credit squeeze” to slow the economy. This included a system of statutory reserve deposits from 1960. These tools were subsequently dropped, often because changes such as a floating currency made them impossible to apply. But there was no introduction of an explicit power to make the RBA independent of the government of the day.
Chalmers’ proposed change has been strongly criticised as a mistake by former Bank governors Ian Macfarlane and Bernie Fraser, plus Treasurers Paul Keating and Peter Costello. The Guardian reported that Macfarlane, who was governor from 1996 to 2006, said the power to intervene was for extreme circumstances. He said it was created after the then Commonwealth Bank used its central banking powers to refuse to release funds for a nation building infrastructure program in the 1930s to stave off the impact of the great depression. Macfarlane noted that during this period Australia’s unemployment rate rose to 32% in 1932.
Nugget Combs was the first governor of the de-facto central bank within the Commonwealth Bank in 1949 and then governor of the newly separated Reserve Bank of Australia in 1960 until 1968. He is understood to have been a key supporter of the inclusion in the 1959 Act of the ability of governments to intervene to resolve differences of opinion with the Bank. He was also a strong advocate of the inclusion of full employment as a key goal of the Reserve Bank and deeply concerned about the damage caused by letting inflation rise to high levels. He did not see these goals as always mutually exclusive.
Chalmers is yet to give an explanation for why he wants to make such a fundamentally undemocratic change to the Reserve Bank.
Article updated March 21, 2024.
Brian Toohey is author of Secret: The Making of Australia’s Security State.
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