Eslake is the latest in a string of economists including former Treasury official Steven Hamilton and the Grattan Institute’s Brendan Coates to criticize the RBA’s interest rate settings over recent years. Those criticisms have fed into a review of the RBA ordered last month by Treasurer Jim Chalmers.
Eslake said the RBA had made two significant mistakes: putting a date on how long it would keep interest rates at record lows, and assuming inflation would only rise due to faster wages growth.
He said the bank had, through its quantitative easing program, created another looming problem that would flow directly to the federal budget bottom line.
The bank may end up passing on $10 billion in interest to commercial banks that had money sitting with it, while all the government bonds bought by the RBA have very low interest on them.
The gap between what it had to pay commercial banks and the interest it earned on its own debt holdings meant the RBA’s ability to pay dividends to the federal government might be “wiped out”.
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Over the past five years, the RBA has paid $9.5 billion in dividends to the federal government, including $2.6 billion in 2020-21 despite making a loss of $4.3 billion.
Eslake said the lack of dividends would be just one of the problems for the government as it sought to repair the budget, which is carrying almost $900 billion in gross debt, noting tax reform would have to be considered.
“Much of the ‘budget repair’ task will need to be accomplished from the revenue side – ideally through tax reform, not via ‘bracket creep’,” he said.
There may be some respite for home buyers, with figures out of the United States showing inflation in the world’s largest economy was flat in July. Annual inflation fell to 8.5 per cent from 9.1 per cent.
Oxford Economics chief US financial economist Kathy Bostjancic said the Federal Reserve might downsize its expected interest rate increases over coming months if inflation pressures continue to ease.
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