Review of the Reserve Bank of Australia annual report 1998-99

Media release: 26 June 2000

INTEREST RATE RISES AND THE RESERVE'S INDEPENDENCE

The Reserve Bank's reasons for increasing interest rates four times in the past six months and its independence from government are key issues featured in a House Economics Committee report.

The House Economics Committee released its final report on the Reserve Bank of Australia Annual Report 1998-99 and the Bank's Semi-Annual Statement on Monetary Policy, May 2000, today, Monday 26 June.

The report is based on discussions between the Governor of the Reserve Bank and the House Economics Committee at a public hearing on 22 May.

The House Economics Committee Chair, David Hawker, said: 'In its report the House Economics Committee was pleased to note that the economic reforms of recent years have strengthened the fundamental structure of the economy and permitted a higher rate of growth to be maintained without rapid increases in inflation.' 'The Committee understands the need to restrain inflation, but it is also essential to ensure that the economy continues to grow, and that particular sections of the community are not excessively affected.'

Mr Hawker said: 'The Reserve Bank Governor, Ian Macfarlane explained to the House Economics Committee that the continued strengthening of the international economy meant that the expansionary monetary policy applying in 1999, was no longer appropriate.' 'Mr Macfarlane said that there were indications that inflation was increasing and the Bank was seeking to avoid that trend', Mr Hawker commented.

Another issue that was raised is whether the Reserve Bank is truly independent of government. 'In evidence to the House Economics Committee, the Governor assured the Committee that there has been no pressure on the Reserve Bank Board to do anything other than that which the RBA Board would normally wish to do', Mr Hawker said. 'The Committee notes that the 1996 agreement on the conduct of monetary policy made between the Government and the Governor, clearly states that it is appropriate for the Government to comment on monetary policy from time to time. The House Economics Committee will be probing this matter further at its next hearing later this year.'

Other issues highlighted in the report include:

• the Bank's optimistic expectations that the economic expansion can be sustained for a 10th and 11th year;
• the Bank's continuing confidence that although inflation is expected to rise with the introduction of the GST, this will be a temporary effect;
• the Bank's view that a round of wage claims seeking additional compensation for the GST would not be necessary, as the income tax changes more than compensate for the GST;
• the role of the exchange rate in the Bank's decisions on interest rates;
• differing views on the Bank's intervention into the foreign exchange market;
• the links between monetary and fiscal policies;
• the ongoing debate on links between the Australian and US economies;
• ways of enhancing the transparency of the Bank's decision making process;
• ongoing examinations of fees for credit transactions by the Bank and the ACCC; and
• new data on bank fees and charges which continues to show that customers without a loan, and those with small balances and high levels of transactions, will not have benefited from the recent positive trends in banks' pricing practices. a review of the RBA's forecasts for the economy and the failure of the predicted slowdown in growth to emerge;

The Reserve Bank Governor will next appear before the House Economics Committee on 11 December in Wagga Wagga. This will be the first time that one of the biannual public hearings has been held in a regional centre.

Ends
26 June 2000

Further information:
David Hawker MP (Chairman) 02 6277 4100
Tas Luttrell (Principal Research Officer) 02 6277 2375
Email: EFPA.Reps@aph.gov.au
Sally Webster (Media Adviser) 02 6277 2063 Mobile: (0401) 143 724
E-mail: Sally.Webster.Reps@aph.gov.au

A copy of Mr Hawker's tabling speech is attached

For a copy of the Committee's report see:

• internet: http://www.aph.gov.au/house/committee/efpa/rba9899/interimrep.htm
• or contact the Committee Secretariat.

Committee Membership 39th Parliament

Chairman: Mr David Hawker MP
Members:
Mr Anthony Albanese MP
Ms Anna Burke MP
Ms Teresa Gambaro MP
Mrs Kay Hull MP
Mr Mark Latham MP
Mr Christopher Pyne MP
Hon Alex Somlyay MP
Dr Andrew Southcott MP

TABLING SPEECH: DAVID HAWKER MP, CHAIRMAN

Mr Speaker this report of the House Economics Committee reviews monetary policy and the operation of the Reserve Bank particularly over the past six months. It is based on the committee's public hearing with the Governor of the Bank, held on 22 May 2000.

The Committee was pleased to note that the evidence indicates that the reforms of the last few years have strengthened the fundamental structure of the Australian economy. This has in turn permitted a higher rate of growth to be maintained, without the rapid increases in inflation which ended our earlier growth periods.

The report also examines the likely impact of the New Tax System after July 1. The Committee notes that an initial increase in the level of inflation is anticipated but will watch closely to see whether inflation returns to normal levels as quickly as the Bank expects. This outcome will be crucial to the economy's growth over the next two or three years. A round of wage claims seeking additional compensation for the GST would not be helpful. In the Bank's opinion, such claims will not be necessary, as the income tax changes more than compensate for the GST.

A major issue of concern to the Committee addressed in the report is the fact that the Reserve Bank had acted to increase the key interest rate - the overnight cash rate - four times between 3 November 1999 and 3 May 2000.

Those increases, totalling 1.25% or 125 basis points, raised the cash rate from 4.75% to 6%.

The Reserve Bank said that the increases were required to restrain inflation because the underlying measures of inflation were increasing and credit transactions were growing at a rate that could not be sustained in the long run.

The Bank stressed that until the end of 1999, Australia had applied a very expansionary monetary policy and that in the changed economic circumstances in world markets this was no longer appropriate.

The Bank said that the aim of its monetary policy was to continue Australia's long period of continuous growth - already approaching nine years - and longer than the periods of growth achieved in the 1970s and 1980s.

The Committee, while accepting this reasoning, was very concerned at the effects that increasing interest rates could have, particularly in sectors such as housing loans. It was also concerned at indications of a sharp decline in consumer spending. The Committee will continue to monitor these matters in the months ahead.

In recent statements the Bank has begun referring to the exchange rate as a factor in its decisions on interest rates. The Committee questioned this and the Bank explained that exports were now playing a much greater role in Australia's growth. This change, combined with the decline in the value of the Australian dollar, had produced inflationary effects that had been absent in the last few years.

In the report there also is considerable discussion on whether the Reserve Bank is truly independent of the Government. The 1996 agreement on the conduct of monetary policy made between the Government and the Governor, clearly states that it is appropriate for the government to comment on monetary policy from time to time. In evidence the Governor assured the committee that there has been no pressure on the RBA Board to do anything other than that which the Board would normally wish to do. The committee will be probing this matter further at its next hearing.

Other issues addressed in the report include:

• the transparency of the Reserve Bank's decision making process;
• links between monetary and fiscal policy;
• the relationship between the Australian and US economies;
• the Bank's intervention into the foreign exchange market;
• new data on the Bank's assessment of bank fees charged to consumers, particularly households and small businesses; and
• progress with the examination of interchange fees, between credit card providers and the banks.

The Committee will continue to follow up these matters at our next hearing with the Governor, to be held in Wagga Wagga on 11 December. That will be the first RBA hearing ever to be held outside the metropolitan capitals.

I thank the Reserve Bank officers, especially the Governor Ian Macfarlane, for their assistance with this review of the Bank's policy and activities. I also thank all Committee members, the secretariat staff, the Parliamentary Library, the Parliamentary Education Office and the Liaison and Projects Office for their contributions to this inquiry and report.

In conclusion, once more, on behalf of the Committee members and secretariat staff, I express our sorrow over the untimely death of the Deputy Chairman, Greg Wilton. Greg, like other members of this Committee, worked hard to achieve a bipartisan approach to the Committee's work.

I commend the report to the House.

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