Craig Thomson (Dobell, Australian Labor Party) Share this | Link to this | Hansard source

On behalf of the Standing Committee on Economics I present the report of the committee entitled Review of the Reserve Bank of Australia Annual Report 2008 (Second Report) together with the minutes of the proceedings.

Ordered that the report be made a parliamentary paper.

In September 2008, as the impact of the Lehman Brothers collapse became clear, countries around the world the world tried to protect their economies from the downturn. The Governor of the Reserve Bank noted that by February 2009 the resulting contraction in economic activity in the December quarter was severe in many countries and that global growth had suffered its biggest setback in decades. Just 12 months later, the Australian economy proved its resilience by avoiding a recession.

At the August 2009 hearing the governor was optimistic about the Australian economy and noted that Australia had several advantages including a sound financial system, an absence of the worst of the problems afflicting some countries, exposure to an emerging China and scope to use macroeconomic policies to cushion the downturn. In addition, the Reserve Bank acted decisively through its monetary policy decisions. In September 2008 the policy cash rate was at a contracted level of 7.25 per cent. With the collapse of Lehman Brothers it became self-evident that rates would need to be cut. Where the Reserve Bank showed leadership was through the size and speed of the cash rate reductions that occurred and they occurred with equal significance and decisiveness in terms of fiscal policy acting in concert with monetary policy.

Between September 2008 and April 2009 the Reserve Bank reduced the policy cash rate by 425 basis points. Three rate reductions were in the order of 100 basis points each. It was also notable that the Reserve Bank held off when the policy cash rate reached three per cent. Financial markets were at one point factoring a cash rate of less than two per cent. The contribution the bank’s monetary policy made to underpinning the economy during the height of the downturn cannot be underestimated and will certainly be a benchmark response for future governors of the Reserve Bank to note.

While the Reserve Bank’s approach to monetary policy during the height of the financial crisis showed sound leadership, the period ahead is no less challenging. It is now apparent that the bank has turned to its core objective of inflation targeting. In October 2009 the Reserve Bank was possibly the first among central banks to increase rates. The governor has made it clear that the emergency rates during the crisis would be inappropriate as the economy started to grow. The bank’s objective is now to lift rates to a normal or neutral setting that will provide for long-term growth and core inflation in the target band.

The management of monetary policy, however, during the next six to 12 months will be associated with some risks. The first challenge for the board is the timing and the size of the rate increases. The governor commented that the timing and pace of those adjustments, if and when they come, will be a matter for careful consideration, taking into account all the relevant factors including what might be happening with market interest rates. While the economy is returning to high levels of growth there is still some fragility in the economy. Unfortunately unemployment could still rise and manufacturers and other export-based industries are under pressure from the strong Australian dollar. The bank must be certain that any rate rises during the next 12 months do not work against the economy’s return to trend levels of growth. Conversely, the Reserve Bank needs to ensure that inflationary forces are kept in check and that medium-to-long-term inflation is forecast to be in the target band. These challenges are why the next hearings with the Reserve Bank in February and later in August 2010 are significant. The Reserve Bank has an important responsibility to the Australian community and it will need to account for its performance, particularly during the cycle ahead.

On behalf of the committee I would like to thank the Governor of the Reserve Bank, Mr Glenn Stevens, and the other representatives of the Reserve Bank for appearing at the hearing on 14 August. I would also like to put on record on behalf of the committee our thanks to the secretary and the secretariat generally for the work they have done with this committee. The next public hearing will be on 19 February 2010 in Canberra. I commend the report to the House.

Scott Morrison (Cook, Liberal Party, Shadow Minister for Housing and Local Government) Share this | Link to this | Hansard source

I echo the comments of the member for Dobell and my thanks go to the Reserve Bank governor and his entire staff for the work that they do as well as the secretariat of the committee for their hard work in putting together the report.

It is a privilege to be involved in this committee and have that opportunity to address what are some of the weightiest issues this parliament considers. The Reserve Bank governor, in the course of the hearing that was undertaken earlier this year and in his numerous statements since then, has outlined—and these are echoed in the report—some fairly sound warnings and some fairly sound observations about what is taking place with our economy.

Firstly, I think we have to acknowledge, and the Reserve Bank governor has made it very clear, that the conditions the government based a series of judgments on have not proved to be as bad as anticipated. The Reserve Bank governor has said on numerous occasions ‘the risk of serious economic contraction in Australia has now passed’. That was on 3 November 2009. In his speech on 15 October he says:

Now that the risks of really serious economic weakness have abated …

He also says:

The period of greatest weakness in the Australian economy has probably passed.

The government sometimes suggests that the opposition is being reckless in making these observations but I merely restate the observations made by the Reserve Bank governor through this process. The other thing the Reserve Bank governor said on 15 October was that:

The Board is also conscious, though, that a risk-management approach requires policy to be recalibrated as circumstances change.

The Reserve Bank governor knows that circumstances have changed. He has said that very clearly to our committee. He has said it very clearly in the various statements that he has made in that capacity, but I am disappointed that the government does not seem to be heeding that message. Circumstances have changed. Policy is required to be recalibrated. The Reserve Bank is doing that job. The government is not recalibrating its policy and is continuing to spend money on the same timetable and the same process.

The other point that the Reserve Bank governor made was about delays in the delivery of the various programs and stimulus packages that eventuated. At the time of our hearing back in August, he was not concerned that there might be slippage in the program. But, as we have seen since then, with delays in the education program and also those that I am noticing in the housing program, as these stimulus projects start to lag and fall into a different part of the cycle, there is one inevitable conclusion, and that is to put further pressure on interest rates than would otherwise be the case.

In addition to warning about how conditions have changed and that there is a need to reconsider one’s position, the Reserve Bank governor has said that it is important for monetary policy and fiscal policy to work together. The Reserve Bank governor has made that very clear. In fact, the Treasurer has also made it very clear. In February of last year he said:

It is very important that we put in place a fiscal policy that backs up the monetary policy which is put together by an independent Reserve Bank … And because, as the Minister for Finance and Deregulation was saying, spending has been out of control, we have got to bring it back into control.

I will further quote the Treasurer. He said on 23 February 2008:

One of the reasons the Reserve Bank has been backed into a corner is that you … spent and you spent and you spent and you spent.

In the context of the Reserve Bank’s comments and warnings, I still find it a concern that, while the Reserve Bank makes these warnings to the government, we are not getting the prudent response from the government that we would anticipate. The Reserve Bank is choosing to be prudent, but the government are continuing to spend in an effort to promote themselves rather than taking the pressure off interest rates, which will inevitably be in the system for the reasons the Reserve Bank governor has outlined.

Thirdly, the Reserve Bank governor has made some very important warnings about bottlenecks that will frustrate our recovery, particularly in the housing sector. There was significant discussion about this matter in the hearings. He made it very clear that this is a supply problem. It is not an issue of finance. It is not an issue of demand management or other demand factors; it is a serious issue of supply. He also made it very clear that monetary policy was not the tool to control asset prices and it would not be used by the Reserve Bank for that purpose. It is not in their charter to do so. He has highlighted that supply issues of land zoning, land approvals and other constraints that exist at a state and local government level must be addressed. Otherwise, we are going to have a very serious housing affordability problem. The government can focus on other areas, particularly the public sector, as far as housing goes, but if they do not address private housing we will have a major issue.

Ms Anna Burke (Chisholm, Deputy-Speaker) Share this | Link to this | Hansard source

The time allocated for statements on the report has expired. Does the member for Dobell wish to move a motion in connection with the report to enable it to be debated on a future occasion?

I move:

That the House take note of the report.

In accordance with standing order 39(c), the debate is adjourned. The resumption of the debate will be made an order of the day for the next sitting.