The most common topic I’m asked when I’m travelling around the country is interest rates. Will they rise? Will they fall? Are they too high? Should I fix my loan, or stay variable. The answers to these questions vary constantly depending upon market conditions.
Another common topic I’m frequently asked about – which is inextricably linked to interest rates – is the Reserve Bank of Australia. What do they do? Are they doing a good job? Are they independent of any political party – even during an election campaign?
I’ve been very vocal in my praise for the RBA and the job it has done keeping Australia afloat during the Global Financial Crisis. Led by Governor Glenn Stevens, they kept their hand on the tiller at all times and used interest rates as a lever to either stimulate the economy (by lowering rates) or slow it down in times of higher inflation by lifting rates (however, I do believe it lifted them a little too quickly in the early parts of this year).
I also strongly believe the RBA has done a good job at exerting its independence at all times – particularly during the last few election campaigns (this one included). The RBA’s decision to keep interest rates on hold during August (and the recent election campaign) was a sound one, and one it took very seriously.
It looked at the economic indicators it had in front of it – a lower than expected inflation rate and uncertainty over global economies – to keep the official cash rate on hold for the third month in a row at 4.5 per cent.
I truly believe that the calling of an election has no bearing whatsoever on the movements of the RBA Board. I believe they would have had no hesitation in lifting interest rates, or for that matter, lowering them if they believed economic conditions would have warranted it.
While the Federal Treasurer is responsible in appointing the Governor, Deputy Governor and Secretary to the Treasury (for terms of up to seven years), and can also appoint up to six other non-executive Board members for terms of up to five years (there is no limit to the number of terms they may serve).
The current Governor was appointed by the then Federal Treasurer Peter Costello, who also appointed a number of other Board Members during his tenure.
You need look no further than the 2007, when the RBA lifted rates during that federal election campaign. It obviously did no favours for the then Prime Minister John Howard and his Liberal Government.
It’s strong evidence that the RBA are not swayed by the people who gave them the job. They are there to do a very serious job and that is to foster stability in Australia’s financial system. It’s a job I believe they are doing well, but they need keep rates where they are for the quite awhile.