The most important reserve bank governor for Australia?

Michelle Bullock, the new governor of the Reserve Bank of Australia (RBA), is shaping as one of Treasurer Jim Chalmer's best appointments, but one he may well be regretting. We should be grateful.

The RBA has decided to leave the cash rate where it is. This is the first decision made under changes recommended by the "Review of the Reserve Bank." Story continues below advertisement AD

Because of the review's recommendations, we are better informed of what the bank is thinking. It now puts out minutes of its meeting, and the governor of the bank also does a press conference. These are good innovations.

Reserve Bank meetings used to occur on the first Tuesday of the month, apart from January, making for 11 meetings.

Under the new rules, the bank will now meet every six weeks, making for eight meetings a year, and meetings will occur over two consecutive days, rather than being a one-day event.

I'm not sure why this would necessarily lead to better decisions, but in the case of the meeting just gone it hasn't impaired the bank's judgement.

It's certainly plain from the minutes and the press conference that the RBA intends to lean against federal government policy and that the interest rate relief the government appears to crave is not coming any time soon.

The bank warns that interest rates will not be falling until it is sure that prices are constrained and will fall into its target range of 2-3 percent. It expects this to happen by 2025.

At the same time, the governor also opined that rates would not be going back to 0.15 percent, which she says was an emergency reaction to the unprecedented pandemic.

In other words, rates may not have far to drop anyway.

The RBA is most concerned about inflation in services, and it assumes that wage increases are now restrained, and consistent with its inflation target. Story continues below advertisement AD

It also acknowledges that there are still some logistical challenges hanging over from the COVID period, as well as materialising as a result of more recent disruptions, such as the Houthi actions in the Red Sea.

The wages position is interesting.

For example, the CFMEU, a construction union, just secured a wage deal for its workers in Western Australia of 25 percent over four years, consisting of an immediate 10 percent rise, followed by three years of 5 percent each. Signs for CFMEU and Metrotunnel can be seen on a crane in central Melbourne, Australia, on Oct. 30, 2023. (Susan Mortimer/The Epoch Times)

In a climate of negative productivity growth, that wouldn't seem to be consistent with inflation of 2 to 3 percent.

And it's not that the RBA isn't worried about productivity growth-it is, and the need for productivity growth is one of the themes that it is pushing heavily.

Clashing policies

One possible explanation for this seeming inconsistency could be that the RBA as presently constituted is one of the few institutional anchors deterring the federal government from enthusiastically implementing its radical agenda.

So the government is quietly combating it.

To negate the RBA's productivity pitch, they try to redefine the things that contribute to high productivity so that they even include higher wages.

This is to disguise the fact that so much of their legislative agenda is productivity-destroying, particularly in those areas where they have mandated higher wages.

That is putting the squeeze on services such as aged care and childcare, as well as turbocharging the growth in National Disability Insurance Scheme (NDIS) outlays and other areas that compete for similar staff.

Their labour laws will also make it more expensive and risky for businesses to hire staff and drastically interfere with contract and gig work, leading to increased costs and inflexible and unresponsive workforces.

The government has also reintroduced the ability for unions to pattern bargain. And they've taken the brakes off the CFMEU by abolishing the Australian Building and Construction Commission.

This makes infrastructure, commercial and industrial developments, and housing more expensive, as well as spilling over into Australia's one really bright spot, the mining industry.

We have essentially gone back to the creaky and combative industrial relations environment of the 70s.

The union movement is quite conscious of this with Australian Council of Trade Unions (ACTU) Secretary Sally McManus recently quoted saying that wages aren't a problem because our system isn't like it was in the 80s.

In fact, the 80s was when the system was reformed under Labor, following on from the wages break-out of 1982 when deregulation of the wages system, combined with pattern bargaining in the mining industry, pushed wages up in anticipation of benefits that never came.

She must know better. This is a deliberate deflection from the decade we do resemble - the one before.

Bullock has her work cut out

So Ms. Bullock must look like a headache to the treasurer. Rates to stay up for longer and not fall as far, and a double-helping of that if he doesn't do something about productivity.

She also makes some comments about anticipation being a factor in inflation. This could be aimed at the government's habit of compensating voters for increases in the cost of living.

When they top-up incomes to pay for inflation they dull the effect of RBA monetary policy. The point of high-interest rates is to hurt consumers and businesses, and cause them to reassess their spending plans.

If there is no hurt, then inflation will stay up, and so will interest rates.

But why was Ms. Bullock soft on wages when she is happy to speak the truth on other matters?

The answer to that might lie in the fact that while we tend to treat the RBA governor like Moses, delivering the tablets from the mountain, in fact, it's the work of the committee, and that committee is undergoing not-so-subtle change to make it more friendly to the government.

There have been two new outside appointments to the board under this government-Iain Ross and Elana Rubin. It doesn't show on their RBA entries, but both have ACTU backgrounds.

Further to that, Mr. Ross was the president of the Fair Work Commission who last year agreed to increase the minimum wage by 8.6 percent absent any improvement in productivity.

The head of Treasury, Steven Kennedy, is also a member, so the government has three members out of nine.

While the old guard on the board still retains control, it is being gradually eroded, and the government and its allies have a substantial say in what interest rate.

It must be a political dilemma for the chair how she works with people who have invested themselves in what she must regard as bad policy.

Perhaps one side of that is you suggest wages are under control in public pronouncements, while making policy as though they aren't.

Nevertheless, having first been skeptical about the appointment of Ms. Bullock, given that she is an RBA "lifer" who has never worked anywhere else, my first impressions seem to be wrong.

Ms. Bullock might be one of the most important governors of the bank ever.