The Greens are calling on Treasurer Jim Chalmers to lower interest rates in exchange for the party’s support on reforms to Australia’s central bank, the Reserve Bank of Australia (RBA), but could it be done?
While it’s legally possible for the Treasurer to change interest rates, it’s never been done.
The Government has described the Greens’ request as “crazy”.
It’s the latest in a string of disagreements between the Greens and the Labor Government that have led to several key pieces of legislation stalling in Parliament.
RBA
The Reserve Bank of Australia (RBA) is an independent body. Its main objective is to try to keep annual inflation within a “target range” of 2-3%.
To do this, its nine-member board sets the cash rate — how much it charges commercial banks for short-term loans. This rate flows through to other interest rates across the economy.
Inflation (rising prices) has influenced the RBA’s decision to increase interest rates from 0.1% to 4.35% over the past two and a half years. Higher interest rates make borrowing money more expensive, which discourages spending.
Traditionally, the Government determines fiscal policy — how taxpayer money is spent. They delegate responsibility over monetary policy (interest rates) to the RBA.
Legally, however, the Treasurer can order the RBA to change its decision on interest rates.
This tool has never been used.
The RBA will deliver its next cash rate decision tomorrow.
RBA review
In 2022, Treasurer Jim Chalmers ordered a review of the RBA. It made 51 recommendations, some of which have already been implemented.
For example, the board now has longer, less frequent meetings, and must hold press conferences afterwards.
Some of the recommendations require changing the law governing the RBA, including giving it a new objective of keeping unemployment low.
Another recommendation was to create two RBA boards: one for interest rates, and one for organisational matters.
Negotiations
In order to pass its RBA reforms, the Government either needs the support of the Coalition, or the Greens and at least three crossbenchers.
Earlier this month, Treasurer Jim Chalmers said the Government and the RBA needed to limit inflation ”in a way that doesn’t smash an economy that is already weak”. Another Labor figure was anonymously quoted by the ABC calling the RBA board members “weirdos”.
In response, Shadow Treasurer Angus Taylor said the Coalition would not support the Government’s changes, accusing them of “bagging” the RBA.
Greens
Today, Greens economic justice spokesperson Senator Nick McKim said: “We aren’t going to pass Labor’s Reserve Bank reforms until interest rates are cut.”
He called on Treasurer Jim Chalmers to use his power to cut interest rates if the RBA doesn’t do so tomorrow.
While this has never previously been done, McKim said it would be justified because “mortgage holders are getting smashed right now.”
Government response
Finance Minister Katy Gallagher said the Greens are “out of control” and ruled out their move to have the Government change the RBA’s interest rate decision.
She told ABC Radio the proposal is “crazy” and reflects a “populist approach” to policy decisions. Populism is a political ideology that positions the average person against established powers like the government and politicians.
“It’s economically irresponsible and we won’t do it,” Gallagher said.
Labor vs. Greens
The stalled RBA reforms are the latest in a series of failed negotiations between Labor and the Greens.
The Government’s proposed environmental and housing laws are stuck in the Senate, as the Greens call for more ambitious reforms.
Last week, Prime Minister Anthony Albanese floated the possibility of calling a double dissolution election, where the entire Senate would be up for election instead of just half.
The aim of this would be to change whom the Government negotiates with in the Senate.
