The functions of the Reserve Bank Board, and by extension its Governor, Dr. Philip Lowe, are set out in section 10(2) of the Reserve Bank Act 1959 (Cth):
It is the duty of the Reserve Bank Board, within the limits of its powers, to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia and that the powers of the Bank under this Act and any other Act, other than the Payment Systems (Regulation) Act 1998 , the Payment Systems and Netting Act 1998 and Part 7.3 of the Corporations Act 2001 , are exercised in such a manner as, in the opinion of the Reserve Bank Board, will best contribute to:
(a) the stability of the currency of Australia;
(b) the maintenance of full employment in Australia; and
(c) the economic prosperity and welfare of the people of Australia.
There has been much discussion in the media about the 2021 statements by Dr Lowe that interest rates were not expected to rise until 2024, and the perception of many that they were misled into taking on significant debts. Now that those predictions have proved inaccurate, people feel the Bank should bear some responsibility for the financial difficulty they face. For the holder of a typically capital city variable mortgage of $600,000, banks passing on the RBA’s rate rises will result in consumers being $20,000 per year out of pocket, after tax. Further, this apparent gaffe was exacerbated by Dr Lowe stating to the Australian Financial Review in June 2022 that even though inflation was (then) approaching 7%, wage rises should not “mechanically” match inflation and should be no more than half that. The implication is that the Reserve Bank is happy for business to increase prices as much as possible and wants all restraint in the economy to fall on the shoulders of the working class. This would seem contrary to clause (c) above which requires the bank to consider the economic prosperity and welfare of the people of Australia. It is unclear whether this can work, as it remains an open question as to whether the people spending up a storm and causing inflation even have mortgages. If they are pensioners with no debt, they would be feeling no pain at all as the government indexing has increased their pension to match inflation.
It is notable that the Reserve Bank’s justification for raising interest rates is controlling inflation, which is not referred to at all within the functions above. Even the Reserve Bank’s own description of its charter and purpose here shows that controlling inflation is simply a policy objective (not a legal obligation) and is meant to be pursued in a flexible way so as to pursue the functions set out above. Keeping the currency stable, maintaining full employment and pursuing economic prosperity and welfare for the people of Australia are more important concepts in the legislation than controlling inflation.
This raises an interesting question on whether or not the Reserve Bank has duty to refrain from engaging in misleading or deceptive conduct in giving out forecasts. The Australian Consumer Law, section 18, prohibits misleading or deceptive conduct in trade or commerce. Further, in relation to predictions about the future, the law holds:
If a person makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act) and the person does not have reasonable grounds for making the representation the representation is taken, for the purposes of this Schedule, to be misleading.
Source: Section 4(1) Australian Consumer Law
People have sued the Reserve Bank for misleading conduct in the past. The court in Sykes & Polybank considered a claim against the bank in relation to the printing of banknotes, as people had relied on the bank’s statements about the timing of the release of polymer bank notes to invest in new equipment. They lost money when the release of the new notes was delayed. Importantly, the court agreed that the bank is subject to prohibitions of misleading or deceptive conduct, even though the relevant claim was ultimately unsuccessful as the court found the bank’s conduct was not misleading and was reasonable in the circumstances: Peter Sykes, Beverly May Sykes & Polybank Pty Ltd v Reserve Bank of Australia [1997] FCA 1464.
It remains an open question on whether the RBA had reasonable grounds for its predictions in 2021. However, given the pain and suffering of mortgage holders, it is not hard to see why the Reserve Bank of Australia, and Dr Lowe specifically, have attracted such criticism.