Distilled by the media scrum, the first Tuesday of most months in recent years has been populated by the sounds of the Reserve Bank of Australia, scrambling to release an update on the cash rate target for the month. However, for most Australians, understanding what the Reserve Bank is and its role in public policy can cause looks of confusion.
Fascinatingly, even those with a Master’s in Public Policy can sometimes struggle to interpret the relationship between the Reserve Bank, the Government of the day, and inflationary targets. With a media scrum focussing on the perils of rising interest rates, rather than educating the masses on the complex relationship between inflation and public policy, an opportunity for policy literacy is missed.
In this piece, we’ll explore what inflation and public policy are. We’ll delve into what these ideas are, and how they can impact the lives of everyday Australians.
What Is Inflation?
Inflation, as described by the Reserve Bank of Australia, is an increase in the level of prices of the goods and services that households buy. Over time, the prices of products typically rise – which is then tracked as a part of inflation indexes such as the Consumer Price Index (CPI).
There are a range of underlying factors that can cause inflation – for example, an increase in the cost of raw materials can impact the cost of products derived from it. Issuing more money (in the form of banknotes) can also cause inflation, as buyers have increased purchasing power.
Finally, external factors such as disruptions from adverse events such as severe weather or pandemics, or government policy, can all have an impact on the price of products and services.
What Are The Objectives of Monetary Policy?
The Reserve Bank of Australia is Australia’s central bank. Independent of the Government, the central bank issues banknotes and determines monetary policy – a policy that aims to meet a set of objectives such as low unemployment and price stability.
The RBA has a set of objectives, outlined in the Reserve Bank Act of 1959. These include:
- the stability of the currency of Australia
- the maintenance of full employment in Australia
- the economic prosperity and welfare of the people of Australia
The Reserve Bank Act doesn’t have an inflation target set in stone – the Reserve Bank uses practical advice from nations around the world to set their own target – currently set between 2-3% per annum.
By being the issuer of banknotes, the central bank can have some sway in maintaining monetary policy in line with its objectives. Adjusting policies such as the overnight cash rate can change just how much money is injected into the economy, providing the RBA with an opportunity to try to stabilise interest rates where possible.
What Is Public Policy?
Public policy, simply put, is another term for government-defined policy. The Government, as elected by the people of Australia, typically delivers policy in line with a predefined party platform.
Party policies are generally taken to an election, where the people can vote for the party that they believe will do the best job for the nation. They cover a broad range of areas, such as transport, immigration, infrastructure, and health.
Occasionally, party policy can run into conflict with monetary policy. For example, a party may wish to provide monetary support to those who are having difficulty paying their power bills, making the Reserve Bank issue more banknotes so that the Government can pay for their policy.
How Do Inflation and Public Policy Interact?
Inflation and public policy can interact in a number of different ways – depending on the Government of the day, the actions they take may have a positive or negative effect on inflationary pressures.
In scenarios where a Government chooses to provide money directly to Australians, the Reserve Bank may be forced to issue new banknotes. For example, during the coronavirus pandemic, the Government of the day injected more than $130 billion dollars worth of financial support into the hands of businesses and individuals across Australia. From policies such as Jobkeeper and Jobseeker, this effort of financial stimulus was intended to keep businesses operating and employees in work – even if businesses were unable to operate due to the impacts of lockdowns and closures.
While this was a broadly popular public policy, it did run in contrast with Reserve Bank policy. Injecting a significant volume of money into the Australian economy at a time when things were shutting down could cause a whole host of negative impacts, such as inflationary pressures as those who didn’t need support capitalised on what was made available without question.
It’s estimated that this injection of funds to support the Australian economy helped cause a high inflation rate – with some analysts predicting that as much as three percentage points of recent growth being caused by an overcompensation of public policy against what was actually required. This ran contrary to the Reserve Bank’s objectives – and it’s thought that these inflationary pressures have disrupted the RBA’s ability to maintain stable monetary policy post-pandemic.
Ultimately, public policy can run countenance to the objectives of monetary policy. While that may seem fiscally irresponsible, in the eyes of the public, that may not always be the case. Governments have to ask themselves what is more important – the will of the people or the will of the numbers?
What Are The Consequences of Poor Policy?
Poor policy can have dire consequences on the populations it serves. Consider the perils of a policy such as income averaging and targeted debt collection on welfare recipients – known as Robodebt, it had a destructive impact on the lives of Australians from all walks of life. Poor or reckless policy can cause irreparable harm to the communities it is intended to serve.
As a result, it’s important that the Government and the Reserve Bank of Australia carefully consider their objectives and the impact that their policies may have on the livelihoods of Australians. While maintaining full employment is important, one must ask, if the definition of full employment is actually an unemployment rate of 4.5%, is the policy setting wrong?
The policies of the Government and the RBA can sometimes be at loggerheads. Ultimately, it’s important that these policies are explored with the needs of the people they serve considered appropriately. Events such as pandemics and war are often unavoidable, so being able to shift policy to meet the needs of the people can often be of critical importance.
The relationship between public policy can be an adverse, and often complex one. It’s hoped that in reading this article, you’ve learned a little bit about how the policy omelette is made, and how it looks to shape the Australia of tomorrow.