Mark Lister, 18 November 2022

The Reserve Bank has come under pressure recently, for a whole range of things - stimulating the economy too much, fuelling inflation, being too slow to tighten monetary policy, and now causing undue pain to households.

I think some of the criticism is unfair. Our Reserve Bank has done no worse than any of its larger peers around the world. If fact, it’s been more proactive in many ways.

The Official Cash Rate (OCR) was cut to a record low of 0.25 per cent in March 2020. Central banks in Australia, the US, UK and Canada all did the same. In Europe, the policy rate was already negative, as had been the case since 2014.

To provide further support and keep longer-term rates low, we also started a large scale asset purchase programme, which is essentially quantitative easing or QE.

Again, all those other central banks took similar action, by either embarking on QE for the first time or ramping up what they were already doing.

I’m not sure if anyone begrudges policymakers taking such action. There was no playbook for dealing with a global pandemic, and the risks of doing not enough seemed to outweigh the risks of doing too much.

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In hindsight, we came through 2020 in better shape than expected and quite remarkably, vaccines were being rolled out worldwide in December of that year.

As the recovery took hold in 2021, it became clear we were heading out of the woods. Central banks turned their attention to withdrawing stimulus and moving back toward normal.

At the same time, prices everywhere were creeping higher. In July of last year, new figures showed that our annual inflation rate had pushed above the Reserve Bank’s 1-3 per cent target band for the first time since 2011.

A week later, the Reserve Bank halted its asset purchases, ahead of its major peers by an average of seven months.

The Bank of Canada did the same three months later, while the Bank of England followed two months after that. Central banks in Australia, Europe and the US were still doing QE well into this year.

The Reserve Bank increased the OCR in October 2021, again much earlier than the rest.

Back then, the Federal Reserve in the US was still insisting inflation was “largely transitory”. It didn’t increase interest rates until March 2022.

The Reserve Bank of Australia was even slower. By the time it moved in May of this year, we had already hiked the OCR four times.

On average, we were six months ahead of those five other central banks.

In fact, if it wasn’t for the snap lockdown (due to the troublesome Delta variant) just ahead of its previous decision the OCR would’ve increased in August 2021, even further ahead of the rest.

In hindsight, I’m sure the Reserve Bank would’ve preferred to act sooner, and differently. It underestimated how bad the inflation problem would become, as did its larger and better-resourced peers.

Having said that, we’re far from alone in this. Our annual inflation rate peaked at 7.3 per annum, the same as Australia and well below that of the US (which rose to 9.1 per cent), the UK or Europe (both of which hit double-digits).

While liquidity and cheap money from central banks everywhere undoubtedly helped fuel this, there have been other factors at play too.

The San Francisco Fed estimates that almost half of US inflation is supply-driven, while about a third is because of demand-side factors. It sees the rest as ambiguous, which probably means it’s a bit of both.

It’ll be broadly the same here too. A lower or higher OCR doesn’t have much influence on commodity prices, goods shortages, closed factories in China or shipping delays.

One could argue the Government has missed a trick with getting our migration settings right. That will have exacerbated labour shortages and fuelled wage inflation, which almost always begets broader price pressures.

The Reserve Bank has played a role in getting us to where we are, but this is not all on its shoulders. In the global central banking league tables, it’s probably not too far from the top.