The job of Reserve Bank of Australia’s (RBA) governor might be one to dodge at the moment, but after waiting 38 years for the opportunity, new Governor Michele Bullock was not going to say no. However, she faces numerous challenges in her new role, including expansionary government policies, increasing red tape, inflationary energy prices, recommendations from the review of the RBA, the high probability of a recession, stubbornly high housing prices, and the decoupling from China.
Having worked for the same organization for 38 years, some may question Bullock’s lack of ambition and diversity in her career. It would have been more reassuring to see a new bank governor with experience in the “real world.” While being the RBA governor doesn’t require Nobel Laureate-level academic prowess, it does require an understanding of how the world works and the art of setting interest rates.
Replacing Philip Lowe, who is often portrayed as a failure, Bullock may share some of the blame if that perception is true. However, it is important not to invest too much importance in the governor as the government is determined to make the RBA board more accountable and less reliant on one economist. If the idea of a separate board of five economists to set interest rates is adopted, Bullock’s role will focus more on managing the rest of the operation.
Lowe’s term ends with several challenges for the central bank. Some argue that the RBA’s inflation target of 2-3 percent on average over time is too vague. Now, it is set to become even vaguer with the addition of the twin targets of inflation between 2 and 3 percent and full employment. However, what constitutes full employment remains unclear.
In the past, the Non-Accelerating Inflation Rate of Unemployment (NAIRU) was thought to be around 4 to 4.5 percent. However, empirical evidence contradicted this as unemployment fell below that level while inflation remained low. The author believes that 4 to 4.5 percent is a realistic figure, especially considering deflation in the cost of goods manufactured overseas at lower labor costs and with government subsidies.
Bullock may face criticism for unrealistic NAIRU expectations from the recent past, which could fuel inflation in the current economic climate. An overly tight job market could lead to increased inflation and pay deals, similar to the one negotiated by National Australia Bank, could proliferate.
Furthermore, Bullock will also have to navigate the state and federal governments’ excessive spending, redirecting funds from housing and discretionary spending. This may result in the need to maintain current interest rates or hike them further. History suggests that current rates are appropriate, especially when compared to rates elsewhere in the OECD.
In addition to these challenges, there is a high probability of a recession. While Bullock may face blame for this, recessions are necessary to re-educate management and weed out underperforming companies, allowing the better-managed ones to thrive.
Overall, Bullock steps into her new role with numerous challenges ahead. It is hoped that she can bring strength and resilience to the position, akin to her surname’s namesake.
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