Sorry, But What Does The RBA Governor Even Do?
When news broke that Philip Lowe would not be reappointed as governor of Australia’s Reserve Bank and deputy governor Michele Bullock would instead step into the role, the first woman to do so, my first thought was: ‘good for her!’. And my second thought was: ‘I simply have no idea what she’ll be doing.’
See, although I try my best, when it comes to economics I am a thoughtless flower in a sunny field. No disrespect, but I literally have no idea what the RBA does, nor do I know what the governor does. Yes, I know interest rates are affected by the RBA and they impose the raises but do I fully understand what those words actually mean? No, no I do not.
Given this news has dominated the media cycle for days, I decided it was high time I understood why I should care about what the RBA does, and what the role of a new governor will mean for us.
Instead of me trying to figure it out alone (we would have been here forever) I sought the wisdom of Dr Isaac Gross, lecturer in economics at Monash University and former economist for the RBA. So let Dr Gross teach you (and me) just what the RBA is, what the governor does and why we as young people should care about it.
Ky Stewart, Junkee: So in a basic outline, what does the RBA do?
Dr Isaac Gross: At the most basic level, they set interest rates in order to try to achieve two goals. They try to keep inflation in check and they try to keep the unemployment rate as low as possible. Those are the two main things that the RBA tries to do.
Recently, they’ve been increasing interest rates, and the main reason they’ve been doing that is to try to reduce the amount of spending in the economy to slow inflation. During the [COVID] crisis, they reduced interest rates in order to increase the amount of spending to reduce the amount of unemployment in the labour market.
Right, so then what is the role of the governor of the RBA?
The governor is essentially the CEO or leader of the RBA and they run the board. In theory, there’s a board of nine people that determines what the interest rate should be. In practice, the governor has, at least, a very large amount of sway over what those interest rates are. I wouldn’t say they have complete control over the interest rates, but they’re the main person we think about when it comes to setting those interest rates.
So the governor obviously has quite a large influence over what the RBA does. Do they then have any affiliation with politicians, or do they speak to the government quite often? What’s the relationship there?
They’re formally independent so they can make any decision they want about interest rates. They don’t have to run it by the treasurer, they don’t need to get approval. It’s a bit like a judge sentencing someone for a crime — they make their decision and there’s very little ability for the government to override that decision.
How does the RBA affect young people and why should they care what the RBA does? I feel like a lot of young people are sort of jaded at the moment when it comes to the economy and financial institutions.
I think the RBA’s work affects young people in two very important ways. The first is that by setting interest rates, [the RBA] affects the labour market. Young people have a higher risk of unemployment than other parts of the population and so when we can get that unemployment rate down low, young people disproportionately benefit.
The second reason is that they set interest rates, [which] is obviously important to the housing market. The recent increases have brought down house prices, which for young people is probably a good thing.
If you’ve just bought a house, you’d probably want that interest rate as low as possible, but if you’re saving a deposit [or for other things], then you’re actually going to be better off if interest rates are high because you get a high interest rate on your savings, meaning you can build up that house deposit quicker and quicker.
So, it affects whether you can get a job and affects whether you can buy a house, which are [both] pretty big deals.
Obviously the news broke recently that Michele Bullock has been appointed as the incoming governor, why is that a significant appointment?
It’s a big deal because Phil Lowe, the current governor, had pretty publicly put up his hand for an extension of his terms. The past two governors had each been appointed for one seven year term initially and then they got an extension to round it up to 10 years, so a pretty long time. But despite putting up his hand… the gig was given to his current deputy Michele Bullock.
First of all, it’s unusual not to reappoint a governor. The government had requested an [external] review of the RBA and that review came up with a lot of suggestions and some implicit critiques. The fact that he wasn’t reappointed I think is a sign that the critiques were taken seriously by the government and they wanted to see some structural change at the RBA due to what the review found.
That’s positive and I guess it’s significant as well that she’s the first female RBA leader.
That’s the other thing, I think the treasurer is always keen to try to improve gender equality when it comes to the big economic jobs that he has the power to appoint and this was obviously one example where he could help nudge that in that direction.
Editor’s Note: The above conversation was edited for length and clarity.
Image credit: AAP Image/Lukas Coch