Reserve Bank 'dallies with indolence' instead of helping government pursue full employment: Paul Keating
- Written by Michelle Grattan, Professorial Fellow, University of Canberra
Former prime minister Paul Keating has launched an extraordinary attack on the Reserve Bank, accusing it of having “one of its dalliances with indolence”, and describing it as “the Reverse Bank”.
Keating, who was treasurer in the Hawke government and once boasted of having the Reserve Bank in his pocket, said the bank’s job was “to help the government meet the task of full employment” and it was failing in this.
He criticised its officials for being “the high priests” of incrementalism, rather than doing what the situation called for.
His outburst, in a statement issued on Wednesday, followed a speech[1] this week by the bank’s deputy governor Guy Debelle who canvassed the pros and cons of options for further monetary policy action if the bank’s board decided it was needed.
These included buying bonds further out along the curve, foreign exchange intervention, lowering rates without going into negative territory, and moving to negative rates.
Keating labelled Debelle’s contribution “meandering thoughts”.
“Knowing full well that monetary policy can now no longer add to nominal demand – something that now, only fiscal policy is capable of doing, the Reserve Bank is way behind the curve in supporting the government in its budgetary funding measures,” Keating said.
“For a moment, it showed some unlikely form in pursuing its 0.25% bond yield target for three year Treasury bonds and a low interest facility for banks.
"But now, after 600,000 superannuation accounts were cleared and closed down, with 500,000 of those belonging to people under 35 – a withdrawal of $35 billion in personal savings, and further demands arising from the employment hiatus in Victoria, [Debelle] yesterday strolled out with debating points about what further RBA action might be contemplated.”
Keating said that in his office when he was treasurer, the bank was nicknamed “the Reverse Bank”, because it was too slow raising rates in the late 1980s and too slow lowering them in the early 1990s – which gave Australia “a recession deeper than it would have otherwise had”.
As treasurer he’d “worn the cost of the bank’s indolence in the task of smashing inflation”. And as a measure of his giving the bank more discretion, as prime minister he’d worn the “great political cost” of the bank’s rate rises in 1994.
“As history has shown, when a real crisis is upon us the RBA is invariably late to the party. And so it is again,” Keating said.
The bank’s act had two objectives – price stability (not a problem at the moment) and full employment, Keating said.
“The Act says the Bank and the government should endeavour to agree on policies which meet that objective – in this case, employment.”
The bank “should be explicitly supporting the government so the country does not experience a massive fall in employment”, hitting particularly younger workers.
But instead of that, Debelle “conducts a guessing competition on what incremental step the Bank might take to help,” Keating said.
“These are the high priests of the incremental. Making absolutely certain that not a bank toe will be put across the line of central bank orthodoxy.
"Certainly not buying bonds directly from the Treasury - wash your mouth out on that one – what would they say about us at the annual BIS meeting in Basel?
"Not even ambitiously buying sufficient bonds in the secondary market, like the European Central Bank or the Bank of Japan.”
He said the bank should “shoulder the load. And in a super-low inflationary world, that load is funding fiscal policy. Mountainous sums of it.
"In an economic emergency of the current dimension that means putting the orthodoxy into perspective and doing what is sensibly required.”
Like other central banks, the Reserve Bank “has become a sort of deity, where lesser mortals might inquire, however respectfully, what the exalted priests might be thinking or have in mind for their prosperity or the country at large,” Keating said.
“The Governor and his deputies do not wear clerical collars and black suits. But that is the only difference in their comport and attitude.”
The Bulletin
