The Treasurer, Peter Costello, is still determined to impose his fight-inflation-first policy on the Reserve Bank, despite the independence granted to the bank by statute.
Earlier he said, “”One of the things I would like to do in the appointment of a new governor is have an exchange of letters which will set out, from the government’s point of view, the targets it would like the governor to have, and the governor, of course, by exchange of letters to agree to do that.”
That was tantamount to the Government laying down the law. Now he appears to have given ground by saying that both the governor-designate and the Government would confirm their commitment to the bank’s target of averaging underlying inflation between 2 and 3 per cent.
This at least acknowledges that the bank’s (and not the government’s) target is the starting point, thereby acknowledging the bank’s nominal independence. But it does so in a perverse way in that it locks the bank in to that target in the future, whereas a truly independent bank would not be so locked in.
The trouble for Mr Costello is that the Reserve Bank Act provides that the board of the bank has the power to determine the policy and the policy should be directed to the greatest advantage of the people of Australia. It mentions welfare, prosperity and full employment, but not inflation.
Mr Costello appears to be attempting to amend the Reserve Bank Act by ministerial fiat … probably because he could not get amendments through the Senate. Another way to get the bank to adopt a fight-inflation-first policy is by putting people on the board who view that as the best way of achieving prosperity, welfare and full employment. Mr Costello appeared to travel that way yesterday.