The Reserve Bank of Australia keeps making the wrong decisions because ‘part-time amateurs’ are making calls on interest rates, a former bank insider says.
Borrowers are widely expected to cop another 50 basis point rate increase on Tuesday, adding to the May, June and July increases that have been the steepest since 1994.
This would see someone paying off an average $600,000 mortgage cop a $169 increase in their monthly mortgage repayments, as the cash rate rose from a three-year high of 1.35 per cent to six-year high of 1.85 per cent.
This is occurring despite RBA governor Philip Lowe repeatedly promising last year to keep the cash rate on hold at a record-low of 0.1 per cent until 2024 ‘at the earliest’.
Peter Tulip, who was the RBA’s senior research manager from 2011 to 2020, said the central bank board, with business leaders, lacked the gravitas to challenge Dr Lowe on flawed decisions.
The Reserve Bank of Australia keeps making wrong decisions because ‘part-time amateurs’ are making calls on interest rates, a former insider says (pictured is governor Phillip Lowe)
Peter Tulip, who was the RBA’s senior research manager from 2011 to 2020, said the central bank board, with business leaders, lacked the gravitas to challenge Dr Lowe on flawed decisions
‘Other central banks have monetary policy decisions made by stars of the economics profession – we have them made by part-time amateurs,’ he told Daily Mail Australia.
‘I was unhappy with the way the Reserve Bank was doing its job, I didn’t think it was doing a very good job.’
Dr Tulip, who is now the chief economist with the Centre for Independent Studies think tank, said the RBA board needs experts at macro-economic measures.
‘They don’t have the training to say to Phil Lowe, “But hold on, governor, doesn’t the research say the opposite to that” or “Why are we doing this when the Bank of England is doing the opposite?” or even “What’s the evidence for that?”
‘These are the sorts of questions are difficult for people without specialised expertise to ask.’
One-time Coca-Cola Amatil CEO Alison Watkins was appointed to the RBA board in December 2020 for a five-year term when she was still earning $2,178,652 a year as the head of the soft-drink bottling company
One-time Coca-Cola Amatil CEO Alison Watkins was appointed to the RBA board in December 2020 for a five-year term when she was still earning $2,178,652 a year as the head of the soft-drink bottling company.
Ms Watkins was last year paid $45,641 to attend five board meetings plus another $4,982 to sit on the RBA’s audit committee.
Ms Watkins was only required to attend fewer than half the RBA’s 11 monthly board meetings.
Fellow board member Mark Barnaba, the deputy chair of Fortescue Metals Group, earns a base salary of $1,162,211 – based on a conversion from $US802,799 in the annual report.
As a Reserve Bank board member, he was last year paid $77,620 to attend 11 board meetings plus another $22,430 to chair the RBA’s audit committee.
Dr Tulip, who was an economist at the US Federal Reserve, said the American central bank’s Board of Governors were academics who were experts on monetary policy.
Fellow board member Mark Barnaba (left with West Coast Eagles CEO Trevor Nisbett), the deputy chair of Fortescue Metals Group, earns a base salary of $1,162,211 – based on a conversion from $US802,799 in the annual report. As a Reserve Bank board member, he was last year paid $77,620 to attend 11 board meetings plus another $22,430 to chair the RBA’s audit committee
‘The model of central banking around the world is increasingly to put experts in charge,’ he said.
‘I used to work at the Federal Reserve Board of Governors where the people making monetary policy decisions actually wrote the textbooks that I studied my monetary policy from.’
Former prime minister and treasurer Paul Keating in 2020 described the Reserve Bank as the ‘Reverse Bank’ because it was too slow to raise rates in the late 1980s and then too slow to lower them in the early 1990s, arguing this gave Australia ‘a recession deeper than it would have otherwise had’.
Dr Tulip said that before the Covid pandemic, the RBA was too slow to cut rates in 2019 when household debt levels were reaching dangerous levels even when inflation was still low.
‘They have a track record of targeting the wrong variable,’ he said.
‘They’ve also targeted the house prices, they’ve targeted indebtedness, these are not things that monetary policy is good at controlling.’
Dr Tulip is more forgiving of cutting rates to a record-low of 0.1 per cent in November 2020 and throughout 2021 promising to keep them on hold until 2024, arguing it was easy to criticise the RBA in hindsight.
Former prime minister and treasurer Paul Keating in 2020 described the Reserve Bank as the ‘Reverse Bank’ because it was too slow to raise rates in the late 1980s and too slow to lower than in the early 1990s, arguing this gave Australia ‘a recession deeper than it would have otherwise had’ (he is pictured right with Prime Minister Anthony Albanese, left, and another former Labor PM Kevin Rudd)
But he argued they needed to raise rates by 75 basis points on Tuesday – not 50 basis points the market is expecting – to reduce the risk of inflation increasing and staying there with unemployment at a 48-year low of 3.5 per cent.
‘Actually, they should be putting up rates a bit quicker,’ Dr Tulip said.
‘There is a real worry – we have 3.5 per cent unemployment – that is just a very tight labour market and in the past, we’ve had unemployment this tight, wages and inflation have accelerated very quickly.
‘If that happened, we would then get a protracted period of unemployment following.’
Treasury is expecting inflation to hit a 32-year high of 7.75 per cent by the end of 2022 – up from a two-decade high of 6.1 per cent in the year to June.
Dr Tulip said it was likely inflation could stay above the RBA’s two to three per cent target beyond 2024, calling into question Treasury’s forecasts.
‘There’s a risk inflation expectations will increase – when that starts getting built into price and wage setting decisions, it takes a lot of unemployment to get back down to the target,’ he said.
In an April paper, Dr Tulip criticised the Reserve Bank for concentrating power too closely with Dr Lowe, arguing that model was ‘centring on one fallible individual’ who answered to ‘non economists with secretive decisions’.
‘That makes mistakes more likely and more persistent,’ he said.
‘So, even if one agreed with past RBA decisions, there is no reason for confidence in the decisions made by future personnel.’
Treasurer Jim Chalmers, who has the power to appoint RBA board members, last month announced a wide-ranging review into the Reserve Bank.
Daily Mail Australia gave a right of reply to the Reserve Bank but it declined to comment.