Australia has launched the first major review of its central bank in decades, after the Reserve Bank of Australia came under fire for delaying interest rate hikes amid runaway inflation, leading its governor to call his forecast “embarrassing”.
The review, launched by Treasurer Jim Chalmers, could result in the RBA’s first major restructuring since the 1990s. It will take into account the bank’s performance, the composition of its board of directors and its strategy for inflation targeting.
As Australia’s economy emerged from the pandemic, the RBA was widely criticized for keeping the cash rate – the measure used to set interest rates – at historic lows, even as other countries rose. lending rates to curb inflation.
The RBA was forced to implement a modest rate hike in May, during Australia’s election campaign and nearly six months after New Zealand’s central bank did, when inflation hit 5%. It has raised rates twice since, abandoning the dove position it held until 2022.
With the RBA indicating it expected to keep rates as low as possible until 2024, central bank governor Philip Lowe said in May that its forecast had been “embarrassing”.
“We should better predict this. We didn’t,” he said.
In a speech on Wednesday, Lowe welcomed the government’s review, saying it was possible to bring inflation back to the target range of 2-3% while keeping the economy “in balance”.
Belinda Allen, senior economist at Commonwealth Bank, said: “Unlike other central banks, where a recession is needed to bring inflation down, the RBA remains committed to raising interest rates while allowing economic growth ( albeit moderate) and low unemployment.”