By guest contributor Ken Atchison, CEO, Atchison Consultants
Competing priorities for economic management from three participants in the Australian government sector do arise from time to time. A lack of policy coordination by the Reserve Bank of Australia (RBA), Treasury and Australian Prudential Regulation Authority has meant that the effectiveness of interest rate policy has been limited.
These three bodies have different objectives. Interest rates in Australia are set by the Reserve Bank in conducting monetary policy with the aim of maintaining full employment. Treasury, answering to an elected Treasurer, manages the Federal Government’s fiscal policy. A robust prudential framework for financial institutions is the primary responsibility of the APRA.
In the aftermath of the Global Financial Crisis (GFC), it was clear that financial regulations, in principle, should be counter-cyclical, not pro-cyclical. Before the GFC, regulators did not contain the sharp growth in credit which built up in the U.S. and Western Europe. The immediate response by regulators after the GFC was that regulations should be tightened so that excessive credit growth would not be repeated. Fortunately, recapitalisation of several banks in a number of countries ensured that lending recommenced. Separately, monetary policy was eased through lower interest rates and quantitative easing.