A small war has broken out amongst some economics on the topic of whether Australia’s central bank has performed well over decades and, specifically, whether it has outperformed other central banks.

The trigger for this debate is the Albanese government review into the RBA’s mandate and operations which was released publicly in early May. It made 51 recommendations, all of which the government has adopted ‘in principle’.

Former RBA Governor Ian Macfarlane wrote recently in the Australian Financial Review (AFR), with some frustration, that there had not been more push-back against the report’s recommendations.

He was particularly unimpressed with the governance reforms, that of creating one RBA board composed of economic academic ‘experts’ to focus on interest rate decisions, and one board to focus on running the bank. Currently, there is just one board to carry out these functions and the non-executive members are typically ‘business’ people and not academic economists.

Macfarlane lamented the ‘elaborate and time-consuming processes’ this extra bureaucracy would create and suggested that other countries which had expert academic boards had not performed better.

In response, a former Treasury official detailed some examples of RBA failure, with a focus on its role in helping create Australia’s 1991 recession. The author noted that preceding this recession, the RBA pushed interest rates up to 17 per cent.

The author argued that the depth of this Australian recession was worse than most other countries, and noted the interest rates were materially higher than that of other countries.

The 1991 recession was indeed scarring, but one fact which seemed oddly missing from the analysis was that post that 1990s recession, Australia’s economy grew constantly for thirty years – a record of stability and achievement matched by no other comparable advanced economy.

If the RBA is on the hook for the 1991 recession, it should also be credited with helping achieve sustained growth in the subsequent decades.

In 2020, Australia experienced a recession due not to mistakes of monetary policy, but the result of deliberate decisions to stymie economic activity of individuals and businesses to prevent the spread of Covid. No one could fairly blame the RBA for that recession.

The International Monetary Fund (IMF) produces statistics enabling the comparison of various economic variables between countries, including annual growth in Gross Domestic Product (GDP), which is widely cited as the best measure of economic performance.

Since 1985, Australia’s annual GDP (adjusted for inflation) has averaged 3.1 per cent. This compares favourably to Canada (2.3 per cent), New Zealand (2.6 per cent), United Kingdom (1.9 per cent), and United States (2.6 per cent).

The IMF also publishes a GDP growth estimate for all ‘advanced’ countries. Since 1985, collectively advanced countries grew real GDP at 2.3 per cent annually. Australia’s growth rate bettered this by a multiple of 1.3.

It could reasonably be argued that average growth rates reflect a wider set of factors than just monetary policy, such as population growth and productivity – both of which are outside the control of the RBA.

A better RBA performance indicator, therefore, is that of GDP variability. In Australia’s system of macroeconomic policy, RBA monetary policy is primarily used as the tool to smooth peaks and troughs in aggregate demand to ensure price rises are stable and average out between 2-3 per cent annually over time.

With some basic statistical formulas applied to the IMF data using Microsoft excel, an indication of GDP volatility between countries can be derived.

One commonly used measure is ‘standard deviation’, which captures how spread out the values are around the mean (average) of the data set, in this case, GDP growth rates of countries.

Since 1985, the standard deviation of annual GDP growth in Australia is estimated at 1.48 percentage points (ppts).

This compares favourably to most other countries. For instance, the UK records a standard deviation of GDP growth at 2.88 ppts and the United States 1.75 ppts. The same measure for all advanced countries is 1.78.

This result holds well for most time periods. In fact, if you compare GDP variability starting in 1996, the year in which then Treasurer Peter Costello formalised RBA independence and the adoption of a 2-3 per cent inflation targeting regime, the relative performance of the RBA to other central banks is even better.

Between 1996 and 2022, Australia records a standard deviation of 1.32 ppts, compared to that of all advanced countries of 1.93. In that period, the UK recorded a GDP standard deviation of 3.16 ppts – more than twice that of Australia.

Another insight into RBA performance is inflation outcomes compared to the formal target of 2-3 per cent over time.

Once again, the numbers look good. In the period 1996 to 2022, average consumer prices grew at 2.57 per cent, very close to the mid-point of the 2-3 per cent target range.

Inflation targeting is an invention of New Zealand economists, so it is instructive to compare the performance of the RBA against that of the Reserve Bank of New Zealand (RBNZ) in hitting the target.

The New Zealand’s target has changed over the years, but between 2012-22, it was set at a range of 1-3 per cent, with a midpoint of 2 per cent.

In that period, New Zealand inflation averaged 1.24 per cent, about 24 basis points higher than the target midpoint. In the same period, the RBA achieved an inflation rate of 2.49 per cent, missing its midpoint target by just one basis point.

The RBA’s performance over the years is obviously not perfect. Inflation is currently 7 per cent and there was the prediction that the cash rate of 0.1 per cent set in 2020 would not rise until 2024.

One issue for which I think the RBA does deserve criticism but often overlooked is the lobbying to be carved out of independent scrutiny in the various public inquiries we have had.

For instance, the RBA was exempted from scope of the 2014 David Murray Financial System Inquiry.

Similarly, the RBA was effectively outside the reach of the Hayne Royal Commission into banking and financial services. This was an oversight in my view as the RBA’s role in supporting bank liquidity is a form of subsidy and may help explain why poor customer service can arise without triggering commercial consequences for banks.

These reviews were opportunities for the public to raise matters of concern and to have those concerns independently assessed.

But, in the bigger picture, their historical performance in helping reduce GDP volatility and therefore keeping inflation stable has been impressive. Indeed, the data objectively shows it has been better than central banks of most advanced countries.

This is an important issue because the central bank is one of Australia’s public sector institutions which has retained a focus on facts and truth and can be relied upon to say and do things that are necessary yet maybe unpopular, like put up interest rates to tackle inflation.

By unfairly or inaccurately attacking the performance of the RBA, critics are eroding the credibility of an institution which is essential to helping grow the economy and improve living standards.

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Nick Hossack is a public policy consultant. He is former policy director at the Australian Bankers’ Association and former adviser to Prime Minister John Howard.

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