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To paraphrase astronaut Jim Lovell … Martin Place, we have a problem.
Martin Place, Sydney is, of course, the home of the Reserve Bank. And the problem the bank has is that new survey work it commissioned has found most Australians have little idea what the Reserve does, what its key aims are and whether it can actually do what people want.
Early last year, the RBA began a new survey to get a grasp of how Australians “experience and understand the economy”, and their views of the bank. Across three separate surveys, more than 9000 people have been quizzed.
To say the results were mixed is an understatement. And they should be a huge warning to the bank that without an increase in understanding and support from the public, the RBA’s social licence will be eroded.
People were asked the impact of higher interest rates on various parts of the economy.
Just over half of those quizzed correctly agreed that higher interest rates would slow economic activity. That’s exactly why the RBA lifts interest rates.
Yet a third of people believed higher rates would increase economic activity, while about 18 per cent were unsure.
The bank noted that the “public generally understands how interest rates affect economic activity”. But if 48 per cent aren’t sure or think higher rates boost activity, that seems a long way short of a “general understanding”.
From there, the answers get worse.
About 51 per cent believed higher rates reduce unemployment while an astonishing 59 per cent believed that when the RBA lifts rates, it is increasing inflation. The bank lifts interest rates to reduce inflation, but only 27 per cent of Australians picked up on that core central bank objective.
About 58 per cent reckon a rate increase pushes up asset prices (think about house prices – it doesn’t), while 44 per cent thought it would lift the value of the Australian dollar.
Governor Michele Bullock has been hot to trot over recent years about her concerns that “inflation expectations” could get out of hand. This is the theory that if the public believes inflation is going to go up and up (or down and down), then prices will go up and up (or down and down).
Just this week, she noted that the bank’s job was to “keep inflation expectations anchored and make sure that shocks don’t lead to lasting increases in inflation”.
But how much can you believe that, when the RBA’s own survey shows a majority of people don’t understand the bank’s role in taming inflation itself?
In the same speech, Bullock talked up the chances of the bank delivering another interest rate rise on borrowers. Reality bit 24 hours later, on Wednesday, when the latest inflation figures showed prices actually eased through June to 3.8 per cent.
It was only in early May that the RBA was expecting the annual inflation rate to hit 4.8 per cent in June.
Not that the public are better gauges of inflation, something confirmed by the ANZ-Roy Morgan weekly measure of consumer sentiment that asks people their expectations for inflation.
For instance, between 2014 and 2019, respondents to this survey on average expected inflation to be above 4 per cent. During that period, inflation was never above 2 per cent.
Ahead of the war against Iran, the survey found consumers expected inflation was on its way to 5.3 per cent. Within a month, this had climbed to 7.3 per cent.
You could argue that while consumers can’t accurately predict the inflation rate, what’s more important is the direction. If people think inflation is on the rise, then they’ll demand higher wages or businesses will perceive they can get away with a price hike or two.
But that requires the public having some idea of where inflation is.
A separate set of survey questions suggests few Australians really understand the RBA’s job.
The Reserve Bank has what is known in central bank circles as a dual mandate. Its job is to deliver both “price stability” (by keeping inflation between 2 and 3 per cent) and full employment.
The survey revealed that three-quarters know the bank sets official interest rates while 71 per cent recognised price stability.
But when it came to full employment, which has been part of the bank’s mandate since it was created out of the Commonwealth Bank in 1960, just 29 per cent recognised it as one of the Reserve’s responsibilities.
Perhaps more confusing is that only 44 per cent knew the RBA produces and issues banknotes.
The RBA, and its predecessor, have been producing the nation’s notes since 1924. But somehow a majority of us failed to notice that the signature of the bank’s governor is on every note.
The survey results should be a particular concern for the Reserve Bank and economists.
If the public doesn’t understand the RBA’s actions, maintaining public support for those actions becomes more and more difficult. It can easily lead to increasingly weird policy ideas (One Nation’s thought bubble to offer 5 per cent, 30-year mortgages, for instance) or a collapse in trust in the Reserve Bank itself.
As part of its survey work, respondents were asked to rank out of 10 their level of trust in the RBA. Almost twice as many people gave the bank zero out of 10 as gave it a perfect score.
The bank has enormous sway over our day-to-day lives. Our democratically elected government has, rightfully, outsourced monetary policy to the bank.
But if the public doesn’t understand what the bank is doing, or actually believes it is taking the economy in the wrong direction, then that feeds into mistrust and tin-foil-hat conspiracy theories.
If an institution loses trust, then its days are numbered.
The best way to build trust is for people to understand what you’re doing and why. The RBA, along with most central banks, clearly needs to do better on that front.
Shane Wright is a senior economics correspondent.
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Shane Wright is a senior economics correspondent for The Sydney Morning Herald and The Age.Connect via X or email.From our partners
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