June 4, 2025 • 5 mins
Listener Wesley asks: We believe in free markets. The Bond market sets interest rates. Forecasts are never correct. predictions of "wage price spirals " never materialise.
Contradictory statements of "We are data driven, we don't see that in our model/forecast". And finally only reaching their mandate once in a decade of both core and headline in the target range.
Why do we have the RBA?
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:03):
Welcome to Ask Fear and Greed, where we answer questions
about business, investing, economics, politics and more. I'm Michael Thompson
and hello, Sean Aleman, Michael Sean. Every now and then
ask Fear and Greed. It's an opportunity for a listener
to get something off their chest. Yes, and Wesley has
done this today. He's written to us on LinkedIn, right,
(00:24):
and he says he's a little bit cynical. Okay, I'll
just preface it with that, Okay. Wesley says, why do
we have the RBA? We believe in free markets. The
bond market sets interest rates, forecasts are never correct, predictions
of wage price spirals never materialize, contradictory statements of we
(00:44):
are data driven, we don't see that in our model
slash forecast, and finally only reaching their mandate once in
a decade of both core and headline inflation in the
target range. Why do we have the RBA? I'm guessing
Wesley feels a bit better now.
Speaker 2 (01:00):
Such cynicism, Wesley, Such cynicism, I mean, it's a good
It's an interesting question where he's not one hundred percent right.
I don't have the question in front of me, is
about who sets interest rates. Bond market set interest rates.
So bond markets set interest rate off a benchmark rate,
which we know is a cash rate which the Reserve
Bank sets. The bond market, particularly Australian government bonds, very
(01:26):
much relies on that cash rate, and so the safest
investment you can get in the bond market or Australian
government bonds, and the next they're called semi so their
state government bonds, and then you might have come off
bank bonds. Then you go out the yield curve. So
in a sense that the bond markets don't set interest rates.
But broadly, why do we have an independent central bank
(01:48):
history in Australia it was sort of de facto independent
by the Hawk government in the early nineteen eighties under deregulation.
I think it was ninety six that Pete Coxcello made
it form. The reason we have an independent reserve bank
is that we don't trust the politicians to do it, okay,
So what they do is set interest rates, and the
(02:10):
Reserve Bank's goal two things are full employment and price stability.
They use interest rates to get full employment, which we're
sort of about now, and price stability, which is keep
inflation low. If you left that to the government, and
we're seeing this in the US, we'll go there in
a moment. If you left that to government, politics comes
into it. And why One of the great reasons that,
(02:33):
I mean, one of the reasons that Australia has had
such a great run for decades is the Independent Reserve
Bank not really being influenced by politicians about how to
run the economy. So they can have long term economic goals.
They don't have an electoral cycle. They know they've got
to keep employment as strong as you can.
Speaker 1 (02:54):
Are you saying that politicians don't necessarily act in the
best interests of the long term economy.
Speaker 2 (03:00):
Shot, surely not. I mean, so all this criticism at
the moment from Donald Trump over j Powell the US
FED saying he should be cunning interest rates. If Donald
Trump was to run the US FED as president, he'd say,
cut interestrates. We're going to cut one percent off. Darry
about it, and you would have rampant inflation, which would
(03:21):
hit US as well. But you'd have rampant inflation in
the US that would hit all sorts of other economies.
Because Donald Trump wants to supercharge economies. That's fine, But
with that comes inflation. So I wouldn't trust Donald Trump
to run the Federal Reserve. And it's the same here,
I wouldn't trust Anthony Albernezi or Susan Lee to run
the Reserve Bank. The Reserve Bank is a sort of professionals,
that's what they do for a living. It also gives
(03:43):
us a lot of credibility and trust. So when you've
got an independent reserve bank, people investing in Australia think, well,
they've actually got a monetary policy is set by people
who are worried about the economy. You know that, you
have the whole separation of powers argument as well, like
better accountability. So lots of good reasons for an independent
reserve bank.
Speaker 1 (04:01):
What about Wesley's comment that forecasts are never correct, That's
not necessarily the case. I mean, they can often be
fairly wide of where we end up, but it's also
subject to conditions that are constantly changing.
Speaker 2 (04:15):
Right, the trend is your friend, Weasiley, The trend is
your friend. So what I mean? You know, a forecast
gives you a number, but at the end of the day,
it's kind of the direction that matters, I think, And
so long as it's not wildly wrong. And the Reserve
Bank has been wildly wrong at times, and we saw
that when they decided to lift interest thrates really quickly
(04:36):
a few years back. That's because its forecasts were wildly wrong.
But generally they're not wildly wrong.
Speaker 1 (04:44):
Do you think that things like that, the declaration that
we wouldn't see interest rate cuts until twenty increases until
twenty twenty four at the earliest, do you reckon that
has perhaps encouraged this kind of view from people like Wesley.
That has damaged the almost the credibility a little the forecast.
Speaker 2 (05:01):
It did damage the credibility without a doubt, and not
even a little bit a lot, okay, because Reserve Bank
got it so wrong. But I think broadly we think
the Reserve Bank does a good job in Australia. It
sets the economic premise to work under its credibility. It's
got long term economic goals. All in all, independent central bank,
(05:22):
good thing. Sorry, where you know what?
Speaker 1 (05:24):
I like Wesley's question?
Speaker 2 (05:26):
I like the question.
Speaker 1 (05:27):
Yeah, I mean, and this is a safe place to
be cynical. Yes, a very safe place, Wesley. We appreciate
a cynical question. We appreciate any question if you want
to send one in like Wesley's done. LinkedIn's a great
place to do it, Facebook, Instagram, Fear and Greed dot com,
tod au, head to our website and send it on
through there.
Speaker 2 (05:48):
Thanks Sean, Thank you. Michael.
Speaker 1 (05:49):
I'm Michael Thompson and this is asked fair and great
Welcome to Ask Fear and Greed, where we answer questions
about business, investing, economics, politics and more. I'm Michael Thompson
and hello, Sean Aleman, Michael Sean. Every now and then
ask Fear and Greed. It's an opportunity for a listener
to get something off their chest. Yes, and Wesley has
done this today. He's written to us on LinkedIn, right,
(00:24):
and he says he's a little bit cynical. Okay, I'll
just preface it with that, Okay. Wesley says, why do
we have the RBA? We believe in free markets. The
bond market sets interest rates, forecasts are never correct, predictions
of wage price spirals never materialize, contradictory statements of we
(00:44):
are data driven, we don't see that in our model
slash forecast, and finally only reaching their mandate once in
a decade of both core and headline inflation in the
target range. Why do we have the RBA? I'm guessing
Wesley feels a bit better now.
Speaker 2 (01:00):
Such cynicism, Wesley, Such cynicism, I mean, it's a good
It's an interesting question where he's not one hundred percent right.
I don't have the question in front of me, is
about who sets interest rates. Bond market set interest rates.
So bond markets set interest rate off a benchmark rate,
which we know is a cash rate which the Reserve
Bank sets. The bond market, particularly Australian government bonds, very
(01:26):
much relies on that cash rate, and so the safest
investment you can get in the bond market or Australian
government bonds, and the next they're called semi so their
state government bonds, and then you might have come off
bank bonds. Then you go out the yield curve. So
in a sense that the bond markets don't set interest rates.
But broadly, why do we have an independent central bank
(01:48):
history in Australia it was sort of de facto independent
by the Hawk government in the early nineteen eighties under deregulation.
I think it was ninety six that Pete Coxcello made
it form. The reason we have an independent reserve bank
is that we don't trust the politicians to do it, okay,
So what they do is set interest rates, and the
(02:10):
Reserve Bank's goal two things are full employment and price stability.
They use interest rates to get full employment, which we're
sort of about now, and price stability, which is keep
inflation low. If you left that to the government, and
we're seeing this in the US, we'll go there in
a moment. If you left that to government, politics comes
into it. And why One of the great reasons that,
(02:33):
I mean, one of the reasons that Australia has had
such a great run for decades is the Independent Reserve
Bank not really being influenced by politicians about how to
run the economy. So they can have long term economic goals.
They don't have an electoral cycle. They know they've got
to keep employment as strong as you can.
Speaker 1 (02:54):
Are you saying that politicians don't necessarily act in the
best interests of the long term economy.
Speaker 2 (03:00):
Shot, surely not. I mean, so all this criticism at
the moment from Donald Trump over j Powell the US
FED saying he should be cunning interest rates. If Donald
Trump was to run the US FED as president, he'd say,
cut interestrates. We're going to cut one percent off. Darry
about it, and you would have rampant inflation, which would
(03:21):
hit US as well. But you'd have rampant inflation in
the US that would hit all sorts of other economies.
Because Donald Trump wants to supercharge economies. That's fine, But
with that comes inflation. So I wouldn't trust Donald Trump
to run the Federal Reserve. And it's the same here,
I wouldn't trust Anthony Albernezi or Susan Lee to run
the Reserve Bank. The Reserve Bank is a sort of professionals,
that's what they do for a living. It also gives
(03:43):
us a lot of credibility and trust. So when you've
got an independent reserve bank, people investing in Australia think, well,
they've actually got a monetary policy is set by people
who are worried about the economy. You know that, you
have the whole separation of powers argument as well, like
better accountability. So lots of good reasons for an independent
reserve bank.
Speaker 1 (04:01):
What about Wesley's comment that forecasts are never correct, That's
not necessarily the case. I mean, they can often be
fairly wide of where we end up, but it's also
subject to conditions that are constantly changing.
Speaker 2 (04:15):
Right, the trend is your friend, Weasiley, The trend is
your friend. So what I mean? You know, a forecast
gives you a number, but at the end of the day,
it's kind of the direction that matters, I think, And
so long as it's not wildly wrong. And the Reserve
Bank has been wildly wrong at times, and we saw
that when they decided to lift interest thrates really quickly
(04:36):
a few years back. That's because its forecasts were wildly wrong.
But generally they're not wildly wrong.
Speaker 1 (04:44):
Do you think that things like that, the declaration that
we wouldn't see interest rate cuts until twenty increases until
twenty twenty four at the earliest, do you reckon that
has perhaps encouraged this kind of view from people like Wesley.
That has damaged the almost the credibility a little the forecast.
Speaker 2 (05:01):
It did damage the credibility without a doubt, and not
even a little bit a lot, okay, because Reserve Bank
got it so wrong. But I think broadly we think
the Reserve Bank does a good job in Australia. It
sets the economic premise to work under its credibility. It's
got long term economic goals. All in all, independent central bank,
(05:22):
good thing. Sorry, where you know what?
Speaker 1 (05:24):
I like Wesley's question?
Speaker 2 (05:26):
I like the question.
Speaker 1 (05:27):
Yeah, I mean, and this is a safe place to
be cynical. Yes, a very safe place, Wesley. We appreciate
a cynical question. We appreciate any question if you want
to send one in like Wesley's done. LinkedIn's a great
place to do it, Facebook, Instagram, Fear and Greed dot com,
tod au, head to our website and send it on
through there.
Speaker 2 (05:48):
Thanks Sean, Thank you. Michael.
Speaker 1 (05:49):
I'm Michael Thompson and this is asked fair and great
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