Reserve Bank of Australia Comes Under Heavy Fire for Covid Era Monetary Policy

The Reserve Bank of Australia (RBA) is on the receiving end of increasingly strident criticism for its monetary policy decisions since the start of the Covid-19 pandemic, and calls for it to be held to higher standards of accountability.  

On 7 September the RBA raised its cash rate for the fifth month in row, with a 0.5 percentage point hike to a seven year high of 2.35%.  

The move has further inflamed criticism of the RBA over its recent handling of monetary policy. Critics say that the RBA encouraged households to take mortgages at the height of the Covid pandemic, by keeping interest rates at unprecedented lows and offering forward guidance.  

Record low interest rates contributed to breakneck inflation however, that has since forced the RBA to ratchet rates back up, causing major pain for mortgage borrowers.   

Former treasurer Peter Costello recently pinned the blame for Australia’s rampant levels of inflation on the RBA, and its failure to exercise greater restraint during the pandemic.  

“We do have to think about mechanisms to make sure that the central bank is held to account,” Costello said to The Australian.  

“If it’s got a target for 2-3% inflation, it should be held to account, and if it doesn’t deliver, there should be some kind of consequence.” 

Almost immediately after the Covid virus hit Australia’s shores, the RBA kicked off a series of cuts to its cash rate target in March 2020. The reduction took the target from 0.75% to a record low of 0.10% by November, where they stayed until May of this year.  

This record low interest rate is one of a number of factors blamed by economic observers for Australia’s rampant inflation since the start of 2022, which rose to a more than three-decade high of 6.1% in the June quarter.  

Warren Hogan, former principal adviser to Treasury and now economic advisor to Judo Bank, has lambasted the RBA for engaging in medium-term interest rate guidance, in a bid to convince borrowers that rates would remain low for the next several years.  

Following its October board meeting last year, the RBA said that rates would not rise prior to 2024. This gave reassurance to prospective borrowers that the costs of adjustable rate loans would hold steady, helping to fuel demand for the Australian housing market boom that first kicked off towards the end of 2020.  

Hogan said to The Daily Telegraph in August that forward guidance from the RBA was tantamount to “misleading people”. 

While the RBA’s forward guidance gave the market the impression that its target cash rate would remain at 0.10% until 2024, the rampant inflation in 2022 has since forced it to push through with rate hikes two years earlier than originally scheduled. 

Australia’s annual inflation rate rose to 5.1% in the first quarter of 2022, as compared to a print of 1.1% for the same period in 2021. It further accelerated to 6.1% for the second quarter, well ahead of the 2% that it normally considered the safe threshold in modern central banking.  

The RBA now finds itself at the challenging impasse of facing both a housing market slump in tandem with breakneck levels of inflation.  

CoreLogic’s home value index slumped 1.6% in August, for the biggest nationwide monthly decline since 1983. At the same time, the inflation rate is expected by both the RBA and Treasury to hit 7% by the end of the year.  

While in the past, the RBA had always been inclined to reduce interest levels in order to give a swift boost to ailing home prices, the central mandate of curbing overheated inflation means that rate cuts are no longer an option.  

This means that the RBA is likely to press ahead with rate cuts until there are firm signs that inflation has been curbed, irrespective of the collateral impact on the housing market or jobless numbers.