Inflation, wages and cosmetic changes at the RBA

July 28, 2023
The RBA is committed to maintaining unemployment at the 'non-accelerating inflation rate of unemployment', which is around 4.5%. Image: Green Left

While the corporate media is talking up Michele Bullock, her appointment as the next Governor of the Reserve Bank of Australia (RBA) does not signify any significant change in the bank’s inflation-first outlook.

Inflation peaked at 7.8% in December and the RBA has raised interest rates 12 times since May last year to try to bring it to within its 2–3% target. The official interest rate currently sits at 4.1%.

The latest inflation figures, released on July 26 by the Australian Bureau of Statistics (ABS), show a downward trend, with annual inflation falling to 6%.

This has led many economists to predict the RBA will keep interest rates on hold at its August 1 meeting, but the “independence” of the RBA and its composition makes this uncertain.

Who’s on the RBA board?

The RBA board, which currently sets official interest rates at its 11-monthly meetings, consists of the Governor, Deputy Governor, the Secretary of Treasury and 6 external appointments.

Of the six appointees, two are members of the right-wing think tank, the Centre for Independent Studies (board member Mark Barnaba and non-executive director Alison Watkins), while a third, Ian Harper, is a Director of the Robert Menzies Institute, a conservative political institution based at the University of Melbourne.

All nine enjoy economic privilege.

Of the six external appointments, three are directors of major corporations, including CSL, Wesfarmers and Fortescue Metals Group. Two are senior academics at the Melbourne and Sydney Business Schools, while the remaining appointee, Carol Schwartz, is estimated to have family wealth of more than $400 million.

The RBA Governor (currently Philip Lowe) has an annual income of more than $1 million. The Deputy Governor (currently Michelle Bullock) earned a cool $795,000 in 2021, while the Treasury Secretary earns more than $890,000.

By dint of their position, wealth and affiliation, it is safe to assume that no one on the RBA board has suffered rental or mortgage stress, much less the indignity and desperation of unemployment.

Yet, it is up to them to decide interest rates that so significantly impact the lives of working people.

What is the RBA supposed to do?

The RBA was established by the Reserve Bank Act 1959. It is charged with maintaining the stability of the Australian dollar, full employment and “the economic prosperity and welfare of the Australian people”.

The RBA adopted its 2–3% inflation target in 1993 and, since that time (or earlier), has been single-mindedly focused on using monetary policy (official interest rates) to control inflation, even at the expense of its supposed commitment to ensuring full employment and economic prosperity and welfare.

The Howard Coalition government signed a Statement on the Conduct of Monetary Policy in 1996, in which it formally recognised “the independence of the Bank and its responsibility for monetary policy matters”.

All federal governments since have talked up the bank’s “independence”. But, as the board demonstrates, that is something of a fiction. While not directly accountable to government, the Board members’ ties to major corporations, conservative political institutions and wealth mean that their decisions are skewed towards the interests of the ruling, wealthy elites, not the vast majority of working people.

As for maintaining “full employment”, the RBA has a curious understanding of that.

“We think of full employment as the point at which there is a balance between demand and supply in the labour market (and in the markets for goods and services) with inflation at the inflation target,” Bullock said to the bosses’ Ai Group on June 20.

“[T]his is the level of employment that is sustainable with our price stability mandate in the longer term”.

Bullock said the RBA is committed to maintaining unemployment at the non-accelerating inflation rate of unemployment (NAIRU) — unemployment high enough that the availability of workers is sufficient to limit working people’s power to demand decent wages.

Bullock estimated this level to be around 4.5%.

“While 4½ per cent is higher than the current rate, this outcome would still leave us below where it was pre-pandemic and not far off some estimates of where the NAIRU might currently be,” Bullock said. “In other words, the economy would be closer to a sustainable balance point.”

Unemployment was 3.5% in June according to the ABS. Yet, the RBA would like unemployment to rise by another 100,000 or more, to achieve a “sustainable balance point”.

Profits, not wages, to blame

Progressive economists do not agree with the RBA’s focus on unemployment and wages as the underlying cause of inflation.

“There’s simply no doubt that profits have played a significant role in driving Australia’s inflation in recent years,” said Dr Richard Dennis, executive director of The Australia Institute, on July 15.

“The determination of Philip Lowe to say that profits weren’t a significant part of what’s happening in Australia was just bizarre. And his determination to jawbone workers and say you better not ask for more wages because you will be causing inflation, when he was absolutely silent about the fact that Qantas was lifting airfares far faster than the cost of travel.

“Wages haven’t been out of control in Australia for a decade. In fact, we’ve had really slow wage growth in Australia for the last decade and we’ve got wages going backwards at the moment.

“The RBA has not done any analysis of the inflationary impact of $20 billion in Stage 3 tax cuts … which will give $9000 a year to people earning over $200,000.

“Why isn’t the RBA saying ‘Gee, is that going to lead to inflation?’”

Australian Greens spokesperson Senator Nick McKim criticised Labor’s failure to take responsibility for interest rate rises. “Unnecessary rate rises have already inflicted immense pain on those who can least afford it because Labor has failed to act. Mortgage and renters have been smashed by record rate rises and will remain nervous that there are more to come. And the risk of recession due to previous rate rises remains real”, he said on July 4.

“Real wages continue to go backwards and the prospect of a wage-price spiral remains a fantasy. Meanwhile, corporate CEOs are getting a 15% pay increase for increasing prices which is actually fuelling inflation.

“But Labor is failing to use the fiscal and regulatory levers it has to make people’s lives better. If Australia is smashed into a recession, it will be Labor’s recession. Their passive acceptance of the neoliberal ideology that is driving the RBA is a betrayal of their roots.”

Workers need a fairer, democratically-accountable, transparent and responsive alternative to the RBA.

Changing the governor, the frequency of its meetings and the bank’s communication style will do nothing to reduce the cost of living for working people. But a tax on super profits, junking the Stage 3 tax cuts for the billionaires and raising real wages and benefits would.

[Graham Matthew is a member of Socialist Alliance.]

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