Australia Sets Rates Secretly as RBA Eschews Transparency in Making Policy
Reserve Bank of Australia Governor Glenn Stevens, with a pay level set more than four times that of Ben S. Bernanke at the Federal Reserve, oversees a bank that’s less transparent than Poland’s in setting policy.
Stevens, who this week kept the RBA’s benchmark interest rate at a developed-world high of 4.75 percent, makes the call on adjusting borrowing costs without a publicly revealed vote of the board -- an anomaly relative to the standard followed by peers in nations from the U.S. to Japan to Poland. A lack of accountability may undermine confidence in the RBA when Australia’s economy turns, University of Cambridge economist Petra Geraats said.
“Australia would be well-advised to strengthen its monetary-policy making framework to be better equipped to effectively respond when more challenging economic conditions arrive,” said Geraats, who has published articles on transparency and delivered presentations on the subject to central banks from Africa to Asia.
At stake is managing an economy that has become increasingly dependent on mining resources for growth, with manufacturers including BlueScope Steel Ltd. (BSL) forced to cut jobs and production as they contend with the strongest exchange rate in three decades. The local dollar has soared about 23 percent the past two years as Stevens boosted rates to contain inflation.
While the Reserve Bank Act of 1959 says questions arising at RBA board meetings “shall be decided by a majority of the votes of the members present and voting,” Stevens has indicated decisions are made by consensus, and no vote tallies are released.
Public comment on monetary policy by board members is also lacking, with Stevens allowing only himself and his deputy to speak on the issue.
“The arrangement we have is that when the bank has to say something about monetary policy, I or the deputy governor will say it,” Stevens, 53, told lawmakers in a Feb. 11 hearing.
By contrast, Fed policy makers have publicly differed this year on whether the U.S. central bank ought to consider additional asset purchases to help pull down an unemployment rate in excess of 9 percent. Germany’s Bundesbank has opposed the European Central Bank’s purchases of bonds of euro-region nations engulfed by the sovereign-debt crisis.
“I do find it awkward that the bank has to speak with one voice,” said Bob Gregory, an economics professor at Australian National University and an RBA board member from 1985 to 1995. “The monetary policy debate is more subdued than it otherwise would be if you had board members out there talking about the decisions.”
One impediment to a more effective board is that non-career RBA members don’t give up their outside jobs, another anomaly when compared with peers. A majority of its members are drawn from business. Current members include an executive vice president of BG Group Plc, a U.K.-based energy company, and the chairman of Fairfax Media Ltd., Australia’s second-largest newspaper publisher.
“There’s always a potential conflict of interest” from the arrangement, said Warwick McKibbin, a member of the Reserve Bank’s board until July 30, adding that he’s unaware of any having materialized. McKibbin said a further difference with other central banks is the presence of a Treasury official on the board, giving the government a voice in policymaking.
“If you had an expert board, you could actually lay out everybody’s issues on the table,” McKibbin, a professor at Australian National University, said from Canberra. “If you start with an expert board you don’t have this dilemma” of revealing board members’ views that may put them in conflict with their own constituents, he said.
While encouraging others to refrain from speaking, Stevens also limits his own availability for comment on monetary policy. He doesn’t hold news conferences like his counterparts at central banks including those of the euro region, U.S., Japan, U.K., South Korea, Mexico, Chile, Peru, Colombia and Canada.
The RBA declined a request from Bloomberg News to speak with Stevens on transparency.
Stevens, whose tenure as governor started five years ago this month, has introduced some measures to enhance transparency. The RBA in December 2007 said it will start releasing minutes of board meetings and publish a statement after each monthly gathering to explain its decisions. That was a change from the previous practice of commenting only when rates were adjusted.
Stevens testifies twice a year before parliament, and the central bank releases quarterly forecasts on gross domestic product and consumer prices. He typically takes audience questions after speeches. Asked for comment on RBA transparency, a spokeswoman for the bank referred to a 2007 speech in which Stevens outlined reasons for deciding to publish minutes of meetings and statements after rates were left unchanged. He also explained his view on keeping some issues in house.
“There are limits to transparency,” Stevens said in the address. “More is not always better, and because the decision to disclose additional information is hard to reverse once made, it should be made with care.”
Under his tenure, Australia was the only major developed economy to avoid a recession in the aftermath of the collapse in the U.S. mortgage-securities market.
“They should be judged on the basis that the Australian economy, over a turbulent decade or two, has managed to come through the period without a technical recession and average inflation around the middle of the RBA’s 2 percent to 3 percent target band,” said Stephen Roberts, a senior economist at Nomura Australia Ltd. in Sydney.
Stevens’s steps on communication haven’t prevented private economists from having difficulty predicting his decisions. In his five years in office, his calls ran counter to the median of economists’ forecasts nine of his 55 rate decisions. That was more than double the four unexpected rate decisions by the RBA governor during the previous five years.
Fixed-income markets have also been blindsided on occasion. Cash-rate futures on Nov. 1, 2010, were pricing in a 76 percent chance that Stevens would hold the cash rate at 4.50 percent, instead of raising it to 4.75 percent as he did. A month earlier, contracts on the Sydney Futures Exchange indicated a 60 percent chance of an increase the day before the RBA held steady.
Among others not kept fully informed of RBA decisions is Treasurer Wayne Swan, who wasn’t told until almost a year after Stevens got a A$234,000 ($248,000) increase in pay in October 2008, according to documents obtained by Bloomberg News under a Freedom of Information Act request.
That pay increase took Stevens’s total compensation to A$1.05 million with a base salary of A$805,000, compared with $199,700 for Bernanke and $516,627 for ECB President Jean-Claude Trichet. Stevens said last month at a parliamentary committee hearing that “I do not set my own pay. The board set it.”
The RBA’s board is also out of step with much of the country when it comes to women, who run the federal government, largest city and second-biggest bank.
Three women, including members Jillian Broadbent since 1998 and Catherine Tanna since March, have served on the 51-year-old RBA board, compared with 57 men. One of six assistant governors at the RBA is a woman. Swan said in July that more can be done on gender balance.
With both of the current female members being from outside the RBA, they fall into Stevens’s category of having to refrain from public comment on monetary policy. No woman has been either governor or deputy governor.
Concentrating the role of communicating monetary policy in one or two officials is “probably not the best arrangement,” said Allan Meltzer, a historian of the Fed and a professor at Carnegie Mellon University in Pittsburgh.
“Having an open public debate keeps people aware of the differences in views and what the issues are -- and that’s a good thing,” Meltzer said.
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