In the latest of his Boyer Lectures, to be broadcast on Sunday, the former Governor says that the Bank decided to move slowly in ending the recession in order to grab a once-in-a-generation opportunity to turn Australia into a low-inflation economy.
At the time Mr Macfarlane was an Assistant Governor under Governor Bernie Fraser.
In the lecture he says that “in earlier recessions, all the policies and all the government rhetoric were pointed towards re-expanding the economy as quickly as possible and reassuring the public that all efforts were being made to cushion the blow”.
But that in 1990, once it became apparent that Australia was going to have a recession “it was reasonably quickly realised that there was an opportunity to achieve something of lasting value out of the unfortunate events"...
He says that while the bank did cut interest rates from 1990 it did it “in a measured fashion” in order to ensure that inflation did not rekindle.
It was a new approach that the former Governor says had the support of the Government led by Prime Minister Bob Hawke and Treasurer Paul Keating.
“It is significant that in March 1991, in the middle of the recession, the Government was prepared to announce a further phased reduction in tariffs, a move that would reduce inflation but do nothing to support the economy,” he said.
In his lecture Mr Macfarlane is at pains to point out that the bank did not set out to create a recession in order to reduce the inflation rate. It merely took advantage of the opportunity that the recession presented it with.
“The experience throughout the developed world… demonstrates an unfortunate but inescapable fact – no country with an entrenched inflation problem has significantly reduced inflation without it occurring in the context of a recession. While everyone would like to find a softer way of doing so, without incurring the unemployment costs of a recession, no-one has found such a way.”
The former Governor says he finds it odd that in the United States the success of the Fed Chairman Paul Volcker in destroying inflation in early 1980’s is viewed positively while in Australia “the equivalent disinflation of the early 1990s tends to be viewed as a monetary policy mistake.”
Mr Macfarlane says that the recession itself was inevitable, given the excesses that had preceded it, and he notes that in the lead up to it the Coalition was arguing for even higher interest rates than the Reserve Bank and the Labor Government were prepared to impose. “Throughout the 1988 to 1993 period, the Coalition Opposition consistently argued for a monetary policy framework that was more hard-line – essentially, the New Zealand model – than that which the Government supported,” he said.
He notes as well that the Hawke/Keating Government does not, as is often claimed, hold the record for the highest Australian interest rates. “They were higher in December 1985, even higher in April 1982, and briefly so in May 1974.” The Treasurers at those times were Paul Keating, John Howard and Frank Crean.
The Boyer lecture will be broadcast at 5.00pm Sunday on Radio National.
