Any objective analysis would have to conclude in the affirmative. A more speculative observation would be that the Board composition has had some role to play with the RBA's poor inflation-fighting track-record over the last decade.
Think about it. In Australia, five of the nine central bank Board members are business people (most other central banks have unconflicted professional economists). These folks all have major commercial interests in Australian businesses. These commercial activities are adversely affected by both rising interest rates and an appreciating currency. Just as worryingly, lay business folks tend not to have a deeply trained/conditioned understanding of the importance of a central bank's credibility, and/or the economic costs of a volatile and high inflation rate. These are presumably things that the RBA executive has to spend a long time educating them on with uncertain success.
Can you imagine, for example, former RBA Board member, Frank Lowy, whose Westfield empire is hugely exposed to the retail sector, pounding the table in favour of pushing lending rates into double digits and crunching retail demand? Maybe, but it seems like a stretch. (It might help that Lowy has always taken Professor McKibbin's counsel.)
A sixth Board member is the Treasury Secretary, who is officially representing the Government of the day, and arguably possesses a dovish bias. This was graphically illustrated during the GFC by the battle between Ken Henry and Warwick McKibbin on how low the RBA's cash rate should go (see next post).
So, all things being equal, six of the nine Board members are not natural advocates for a singular focus on price stability if that involves deep, short-term costs to economic activity and employment.
The seventh member is traditionally an academic economist. The Government has overturned that tradition by appointing a market economist in the form of John Edwards, who was a biographer and advisor to the Labor PM, Paul Keating. Close readers will remember that Keating was changing RBA policy decisions in a dovish direction as late as 1994, which casts a stain on the RBA's claims that it was politically independent by the 1990s.
The Australian's Paul Kelly records that in mid 1994 the RBA was preparing itself to aggressively raise rates to crush the risk of an incipient inflation outbreak. Yet before the first move Keating summoned the Governor of the Bank and the Treasury Secretary to his official residence. As Kelly tells it:
“[Bernie] Fraser's recommendation [notably to the PM] was for a full 1 percentage point increase. The meeting was on Keating's turf. 'The Prime Minister had concerns,' [Treasury Secretary] Ted Evans said in a masterly understatement...The Prime Minister wanted a concession. He argued that the increase was too much, too sharp. In the end, they knocked 0.25 per cent off Fraser's proposal...[Ian] Macfarlane said: 'I was told they brokered it down to three-quarters of the point'...Keating got a concession.”
