The highly anticipated review of the Reserve Bank will examine tensions between its policy goals, and how governments can work with the RBA to manage the fallout of soaring inflation and rising interest rates.

The three panellists undertaking Treasurer Jim Chalmers’ central bank review released their first public comments on Wednesday night.

Amid calls for RBA governor Philip Lowe to resign over the bank’s handling of COVID-19 and a recent inflation spike, they said their review will focus on how interest rate calls are being made and the difficulties of navigating supply chain shocks like COVID-19 and the war in Ukraine.

The review will consider whether the RBA’s forecasters are up to the task too, with Dr Lowe admitting last week the bank was “surprised” to see Australian inflation hit a 30-year high over the past six months.

And in a sign the review will extend its eye beyond the RBA, the panel said it is “mindful” of the bank’s limits, and that governments have a “much richer” set of options for dealing with inflation and rates fallout.

“Monetary policy does not directly set the rate of inflation or employment, and many other outcomes that are outside the central bank’s remit or control are important,” the panel’s issues paper stated.

Focus of  RBA review

The 18-page issues paper canvassed four areas of focus for the RBA review, which will be handed to Dr Chalmers next year after a series of private and public hearings.

These include the RBA’s policy settings (like interest rates); how it has performed against goals such as stable inflation and full employment; its leadership and governance; and things like its workplace culture.

It comes during a period of heightened scrutiny on the RBA following the first interest rate rises in more than a decade.

The RBA raised its cash rate target from 0.1 per cent to 2.35 per cent in just five months, adding more than $600 to monthly mortgage repayments for those with a typical home loan.

Such rises have sparked public anger, partly because of a perception that the RBA promised it would keep rates on hold until at least 2024.

But Dr Lowe hit back last week, saying that perception was inaccurate.

He has, however, acknowledged that record-low interest rates during the pandemic played a role in fuelling Australia’s inflation crisis, saying the bank was insuring the nation against a huge COVID-induced downturn.

The RBA review panel says it will probe how the RBA made decisions during COVID, including tensions between goals like price stability and full employment amid crises like the pandemic and the war in Ukraine.

It said economic shocks like these wreak havoc on supply chains, which fuels inflation, requiring higher interest rates that reduce employment.

“In that case a central bank faces a trade-off between meeting its inflation and full employment objectives,” the panel stated.

Government role

The panel will consider whether Australia’s flexible inflation target – which requires the RBA to try and ensure inflation is between 2 and 3 per cent over the medium term – is still appropriate.

One issue the panel flagged on Wednesday was that interest rates were already near record lows before COVID-19 after the RBA (and other central banks) were failing to meet their targets.

In the five years before the pandemic, headline consumer price inflation averaged 1.75 per cent – below the RBA’s legislated target band.

And because rates were low to combat this, it was harder for the RBA  to support the economy during COVID because they could not feasibly fall much further to deliver additional stimulus, the panel stated.

That put a greater onus on government spending to support households through the crisis; the panel will examine how that sort of effort should interact with RBA actions in the future.

This indicates the review will extend its gaze beyond the RBA’s decisions and into government policy options.

“Fiscal policy has important implications for the macroeconomic environment and can complement monetary policy,” the panel said.

“During the COVID-19 pandemic, fiscal policy played a larger role than usual in supporting the economy, when monetary policy was constrained by the effective lower bound on interest rates.”