Maxine McKew and I conducted the first broadcast interview with Ian Macfarlane, Governor of Australia's Bank Governor 1996 - 2006 which we put to air on Sunday Profile on 10 September 2006.
The transcript and audio are here.
But, in case they vanish, I am also posting the complete transcript here, for the record:
Tonight - a rare insight into the mind of the man who sets Australian interest rates. Ian Macfarlane has been the head of Australia's Reserve Bank for the last decade and an officer of the bank for a generation.
Until now he's never given a broadcast interview....
Governor Ian Macfarlane presided over his last Reserve Bank Board meeting on Tuesday. Top of his agenda after handing over to his Deputy Glenn Stevens will be a European holiday with his wife and then presenting the Boyer lectures on ABC Radio from Sunday November 12 at 5.00pm - a six part journey through the ups and downs of the Australian economy and Ian Macfarlane's extraordinary part in them.
He has presided over Australia's longest ever period of sustained prosperity. He's helped us navigate the Asian economic crisis, the introduction of the GST, the tech-wreck of 2001 and the subsequent explosion in Australian house prices.
His skill saw him awarded the title of Banker of the Year by the magazine Euromoney in 2002.
Last year the Wall Street Journal put forward his name as a suitable successor to Alan Greenspan as head of the US Fed.
Those international admirers might be surprised by tonight's interview in which he quotes from Monty Python, admits to an 'attitude problem' when he first attempted to join the Bank, and comes close to accusing his political masters of dishonesty.
Stand by to hear 'the Governor' speak more freely than ever before. And to dispel what he says are some myths. One is that he has been the most powerful person in the country.
IAN MACFARLANE:
I'm embarrassed when I see these lists of some of the newspapers draw up of the most powerful people...
MAXINE MCKEW:
And you make the list every time in the Financial Review.
IAN MACFARLANE:
And I'm always much higher there then I should be. The thing is that I have only got power, that's perhaps too strong a word, over one aspect- which is interest rates.
MAXINE MCKEW:
But that's quite a power though, isn't it?
IAN MACFARLANE:
Yes, but even then I have to convince a board and I can't just move this thing about willy nilly, according to my whims, I have to construct a very careful case, I have to argue the case publicly, I Have to get, if not totally support at least a significant support amongst those parts of the community that take an interest in monetary policy.
MAXINE MCKEW:
But you don't have to consult the Treasurer.
IAN MACFARLANE:
No, the board of the Reserve Bank makes the decision, and implements the decision.
MAXINE MCKEW:
Has the board ever rejected a case that you have put before it?
IAN MACFARLANE:
No they haven't. But even then we have to explain the need for action or inaction in the sort of language that the Board of the Reserve Bank can comprehend and find persuasive.
So that is a discipline on us.
Secondly, that might be such a discipline that it might influence the timing. In other words, you might feel, well there is a bit of a case to go now, but it is really not strong enough when you put it down on paper to be convincing to people who might be skeptical and may not have the same intellectual framework in their mind when they approach a problem, as we do.
MAXINE MCKEW:
So putting the decision to the vote, does that help give you cover, if you like?
IAN MACFARLANE:
No, it goes to a vote almost automatically at the end of the meeting. You say; this is the recommendation, who would like to speak for it, who would like to speak against it, and most of the time there is unanimous agreement. On some occasions, a minority of occasions, there may be members of the board who disagree with it, and they register their disagreement.
MAXINE MCKEW:
Do you want to tell us which times they were?
IAN MACFARLANE:
Well some of them are known. In 2003 the Treasury wanted to lower interest rates, and we didn't. So that was already in the papers, so I'm not saying anything new.
MAXINE MCKEW:
So the person most likely probably to have a disagreement would be the head of the Treasury?
IAN MACFARLANE:
No, not necessarily. No, sometimes he would be in complete agreement with me, and it might be someone else who has a different opinion.
MAXINE MCKEW:
Lets go back over some of your early life. You earn more than twice what the treasurer earns. I suppose, the point I'm making is that there is a difference between the way you live now, and your early years, which were very modest, weren't they?
IAN MACFARLANE:
Yes well, I was brought up in outer suburbia, Melbourne outer suburbia, which was in those days, in the fifties, almost semi-rural. Houses where built in areas that didn't have paved roads, or footpaths, or sewerage, or telephones, or what have you.
It wasn't poverty or anything, but it was just a very common environment. Lots and lots of people that I know where brought up in that environment.
MAXINE MCKEW:
This is interesting, isn't it, because we look back on the fifties and sixties and we, certainly political leaders feed into this rhetoric and say, they where the boom years, the years of bounty, of great prosperity, but they where pretty pinched, as you're suggesting, wasn't it?
IAN MACFARLANE:
Well I cover some of this in the Boyer Lectures.
Economic historians have called it the Golden Age, but our living standards where a lot lower than they are now.
MAXINE MCKEW:
Not nearly as many material goodies.
IAN MACFARLANE:
No. Nowhere near. We where struggling to improve, and we did, we have improved over that 50 years, but it's a bit like that Monty Python sketch of saying: Oh, the good old days. Do you know which one I'm referring to?
MAXINE MCKEW:
"I was Born in Lake."
IAN MACFARLANE:
That's right, Oh Luxury!
It seemed a perfectly happy time, but when you compared the material prosperity, or perhaps even access to hospitals and universities, it was quite primitive compared to today.
MAXINE MCKEW:
From Melbourne High, you went to Monash.
IAN MACFARLANE:
Yes.
MAXINE MCKEW:
And what did you do, did you work through the holidays?
IAN MACFARLANE:
Yes I worked as a builders labourer, including building the main building at Monash University, the Ming Wing. And I did a number of other building labouring jobs, but they where very casual jobs, but the beauty of them was that they paid a lot more than being a sales person, or something.
Some of them where filthy jobs, you'd come home covered in cement dust.
MAXINE MCKEW:
Probably Asbestos as well.
IAN MACFARLANE:
Possibly, I don't know.
MAXINE MCKEW:
Lets leap ahead. You certainly had years in Oxford, you where in Paris working for the OECD, and I gather you where rejected the first time you applied for a job at the Reserve Bank. Is that right?
IAN MACFARLANE:
That's correct. When I applied from university, I was asked to sit an attitude test, and they asked me how I would perform in certain situations, and what I preferred, and what I didn't prefer.
And they obviously came to the conclusion that I had a bad attitude, and they sent me a letter saying: don't bother to come in for an interview, end of story.
MAXINE MCKEW:
What do you think they were picking up on? Were you a bit chippy, were you?
IAN MACFARLANE:
I think they had brought a standardised test from some American testing firm, which was designed for large banks who would employ tellers, because one of my colleagues who was an assistant Governor in the in the Reserve Bank, who had a very successful career, he was also rejected.
MAXINE MCKEW:
Did you get rid of the attitude test when you got into the bank?
IAN MACFARLANE:
Yes, yes Indeed. Well I couldn't do it immediately because I wasn't senior enough to do it.
MAXINE MCKEW:
No, no, when you were elevated.
IAN MACFARLANE:
Yes. Yes.
MAXINE MCKEW:
Let's talk about the setting of interest rates. Is it as much an art, something that is intuitive, as it is a matter of mathematical calculation?
IAN MACFARLANE:
If you read a lot of academic treatises on economic policy, you'd think that we have a big econometric model, and that we turn the handle on that, and that determined what we did. That is certainly not the case, I don't really place very much credence at all on economic models.
Mentally what you have to be doing all the time is saying to yourself, when I look back in two years time, what can be the biggest mistake that I can identify being made now, and try and avoid that mistake.
MAXINE MCKEW:
Can you pick one or two, perhaps even more, where you were really agonising about these things, you were awake at three in the morning about these things.
IAN MACFARLANE:
Well I don't think I was awake at three in the morning over anything, fortunately. But there have been periods where it has been difficult. And the recent one, which was a tricky period, was in the year 2003 where the world economy had come out of the mild 2001 recession and it seemed to have hesitated for a while, and certainly in America they were worried that they might actually end up in deflation.
And there was a wave of pessimism that swept around the word, including central banks, and every central bank of substance lowered interest rates except one, which was Australia. I think that one of the reasons we didn't join in with everyone else is that we went through that discipline of saying: what do we think, in the Australian economy, would be the biggest mistake we could make now if we put ourselves two years ahead? And we thought lowering interest rates into a housing boom, with an economy, i.e. the Australian economy, which was chugging along at a reasonably good interest rate, would be the biggest error you could make.
MAXINE MCKEW:
That was in 2003. There was an earlier decision, wasn't there, which was a real marker, and that was after the Asian economic collapse of 97, 98, when countries, such as Canada, New Zealand, pushed up rates and you didn't.
Tell us about that time.
IAN MACFARLANE:
Virtually every country at some point in 1997 or 1998 raised rates, and we didn't, and our exchange rate fell.
MAXINE MCKEW:
The dollar was at what, 55 cents at one stage, wasn't it?
IAN MACFARLANE:
Oh you're memories probably better than mine or your research is more recent.
MAXINE MCKEW:
I've been looking at the research.
But it was very difficult, wasn't it, to go against the orthodoxy, which held that if you take rates up, you will support the currency, which is what others did.
IAN MACFARLANE:
I think it was a finely balanced judgment but there where two things that influenced us. The first was that we did the arithmetic of how much of the fall in the exchange rate would pass through to inflation, an we didn't think it would be all that big.
And the second thing is, we developed a real scepticism on how effective it would be to raise interest rates purely to support an exchange rate. Our view was if you did that, if you put interest rates up to level, which was not warranted by the domestic economy, international financial markets wouldn't believe you, they would just know you'd have done it temporarily and you were going to bring it down again, in which case it would have no lasting impact on the exchange rate.
And so for those two reasons, we didn't do it. But I have to say, that doesn't mean we never would. If the fall in the exchange rate had really been large enough, then there would have been a case to do it.
MAXINE MCKEW:
So this must have been a pretty nervy time?
IAN MACFARLANE:
Well the other important issue at that time, was to make sure that a lot of people thought that interest rates might go up. Canberra was very helpful too. We sat down and talked with the Treasurer and with the Prime Minister, and we all agreed on various things that should be said and should not be said.
MAXINE MCKEW:
Now is that unusual?
IAN MACFARLANE:
It was relatively unusual...
MAXINE MCKEW:
... because this was after the Charter of Independence, the exchange of letters that you had signed with the treasurer in 1996.
IAN MACFARLANE:
Yes, but we weren't talking about what we should do with interest rates, we were talking about what you should do, and what you should say when people say: oh, the Australian dollar has fallen.
MAXINE MCKEW:
So you were talking about the form of words, and the way you would, if you like, publicly enunciate what you were doing.
IAN MACFARLANE:
That's right, because I was worried that there were a lot of people who thought: you've got a floating exchange rate, if you've got a floating exchange rate you don't worry about the exchange rate: it goes wherever it wants too.
And the problem is, that if you say that publicly, it's a red rag to a bull, it's virtually telling every speculator: go short the Australian dollar, because no one is ever going to support it.
So we agreed, and it's an agreement which by and large held very effectively since then, that Canberra, that's the Treasurer and the Prime Minister do not talk about the value of the Australian dollar.
MAXINE MCKEW:
You're listening to Sunday Profile with me Maxine McKew and the just-retired head of Australia's Reserve Bank - Ian Macfarlane, for ten years arguably the most powerful Australian.
Should we be, to a certain extent, grateful if you like, in some way for the pain of the nineties recession because it did break the back of inflation?
IAN MACFARLANE:
We are getting into a very sensitive area here. I have to choose my words very carefully. It is true to say that during my working life, we have had three recessions in Australia - one in mid 70s, one in the early 80s and the one in the 90s that you referred to.
After the first two recessions, we didn't come out if with anything much to show for it. Inflation went down a bit, but it didn't return us to being a low inflation economy. We had an expansion, but the expansion only lasted seven years or so.
MAXINE MCKEW:
So just tell me this, having got through the very troubled 80s and the dreadful fall out, and seen what the recession produced, I mean, was there a real determination in the top echelons of the bank, to rescue something out of the pain?
IAN MACFARLANE:
Yes, I think there was. It's not as though anyone there said, look we've got to get inflation down, lets go out and have a recession. That certainly didn't happen. But I think once we were in it, there was a determination, certainly at the Reserve Bank, and also I think, but perhaps not quite as early, there was also a determination by the Government that they would like to come out with low inflation. Basically, no country has ever got rid of an entrenched inflation problem without having a recession.
MAXINE MCKEW:
So those pillory, for the pain of the 1980s recession, you're suggesting that something else is appropriate?
IAN MACFARLANE:
Well, all I can say is that people ought to read the Boyer lectures. I don't think I come out with a clear answer to that election, other than I do think that period has been misunderstood.
I mean it wasn't a happy period. I'm not trying to claim that that period was a happy period at all. I'm also not tyring to claim that it was all carefully planned, it wasn't carefully planned, nor would I suggest that it was well forecast. The fall in output was bigger than we thought, although not as big as it had been in 1982...
MAXINE MCKEW:
So there were certainly things the bank got wrong?
IAN MACFARLANE:
Yes. The fall in inflation was bigger than we thought, at one stage we thought it was just going to be like the 1982, 1984 recession. So I don't want to give the impression that it was carefully planned, and we knew it was going to be successful, and we did a cost-benefit analysis and decided that the short-run cost was worth the long run benefit, things never run as smoothly as that.
MAXINE MCKEW:
You're listening to Sunday Profile with me Maxine McKew and the just-retired head of Australia's Reserve Bank - Ian Macfarlane, due to deliver this year's Boyer lectures on the ABC in November.
When where Australian interest rates at their highest?
IAN MACFARLANE:
It's either 1974 or 1982.
MAXINE MCKEW:
In 1982, I've got the figures in front of me, I'm playing games here, it's 21.4 per cent, that was the 90 day bank bill rate in 1982.
IAN MACFARLANE:
Yes. And in 1974, depending on how you measure it, you can actually get figures as high, for a few days, as 25 per cent.
So in terms of the bill rate, it's probably 1982 or 1974. In terms of the mortgage rate, it's 1989.
MAXINE MCKEW:
So the bill rate in 1982, that was when John Howard was Treasurer and Malcolm Fraser was Prime Minister?
IAN MACFARLANE:
Yes.
The bill rate was higher in 1982, and it was higher I have to say in 1985 then it was in 1989 as well.
MAXINE MCKEW:
Peceptions are interesting aren't they?
IAN MACFARLANE:
Yes. So there have been two clear situations since we have had good measures of short-term interest rates; 1982 and 1985, where they where higher then 1989.
MAXINE MCKEW:
Tell us then how you regarded, or how the bank regarded the rhetoric during the last election campaign. We do know that the Reserve Bank in fact made objections about some of the advertising, and because RBA was listed as a source, these are objections that went to the Electoral Commission.
IAN MACFARLANE:
Well on the general issue on what a party can say on an election campaign, they can basically say, they can make any claim they want. They can say we are better at this then our opponents, what it is; health, education, interest rates than our opponents, and there is no body that can adjudicate that can say, you're not allowed to say this, or you can say this.
In a democracy, if you think the claims of one party is wrong, then it is up to the other party, or the press or whatever it is, to present the counter argument.
The particular ting that you're referring to was particular cards that were put in peoples letter boxes, which had an error in them, whereby simply the numbers of the interest rates had been sourced from the Reserve Bank, it sounded as though the whole argument had been sourced from the Reserve Bank. And those were the one, I think it only occurred in a couple of electorates, and it was probably due to an error, someone had forgot to put the asterisks where the footnote was suppose to refer to, and we asked for those to be no longer issued, after having consulted the Australian Electoral Commission.
MAXINE MCKEW:
Are you sure it was an error?
IAN MACFARLANE:
Well I think it was because it only happened in two adjoining electorate sin Sydney, and I assume it was probably only an error.
MAXINE MCKEW:
But the claim made by the Coalition was that rates would always be lower under their rule, under Labor. I mean, you were in charge of the interest rates at the time. It warned of mortgage rates under Labor being of ten per cent. Would the bank ever have felt the need to push mortgage rates to ten per cent under a Labor government?
IAN MACFARLANE:
I am not aware of that particular claim.
I do know that their claim was that interest rates would be lower under the Coalition then under Labor, and we were sort of disappointed because this seemed to imply that the central bank did not have the independence to set interest rates.
However, if you were to say that, the Government would respond by saying, no, we know that the central bank is independent, what we are really saying is that the totality of our policy, particularly our fiscal policy and other things, will provide a background that would be more conducive for the Reserve Bank.
MAXINE MCKEW:
But they didn't say that.
IAN MACFARLANE:
Well when challenged, they did.
When people challenged the Prime Minister...
MAXINE MCKEW:
...Well I would argue that that was a nuanced message that was somewhat lost.
IAN MACFARLANE:
Well in politics you don't go for nuanced messages, you go for very bold claims, and when people dispute the bold claim, then you revert back to more nuanced arguments.
MAXINE MCKEW:
Was this the great con trick though? As you know, the Prime Minister and the Treasurer like to boast about the RBA's independence, but they were happy to campaign last time round that it was they who controlled interest rates.
IAN MACFARLANE:
Yeah, I'm not so sure that they campaigned that they controlled interest rates, because as I said, the moment you confronted them they would say: oh no we are not claiming that, and we don't have to claim that for our argument to still be logically defensible.
I mean, politics in hard game, with an election coming up, people grab on to whatever they can grab on to.
MAXINE MCKEW:
Did you think their line was defensible?
IAN MACFARLANE:
Ah, well it was logically defensible, yes. It was a logically defensible position. It was disappointing to us because the bold claim, rather than the more nuanced one, was probably accepted by some members of the community, and if they accepted the bold claim, that indicated that they weren't aware that we had an independent central bank.
MAXINE MCKEW:
Did you ever, were you ever tempted, at any stage, to speak out about that issue, yourself?
IAN MACFARLANE:
No.
MAXINE MCKEW:
Either during the campaign, or after?
IAN MACFARLANE:
No, well, I have spoken after, this isn't the first time that I have mentioned that we were disappointed that interest rates were not only a feature of the campaign, but they were the major feature of the campaign from day one. We were disappointed in that.
But there was no way that I could speak out without effectively becoming a third force in the election, and that would not have been in the long term interests of the Reserve Bank or Australian monetary policy at all.
MAXINE MCKEW:
We've talked about point of recent history, lets just finish this up by talking a bit about the future.
Are you optimistic about the future of the country? Its economic and social future?
IAN MACFARLANE:
Well I am optimistic.
I think the economies are more stable than they use to be.
MAXINE MCKEW:
Economies broadly?
IAN MACFARLANE:
Broadly.
And the swings aren't as big as they use to be. There are a lot of very good reasons why that is the case.
MAXINE MCKEW:
Nonetheless, I gather that you are still worried, if you look internationally, interest rates, do you think they could be higher to reign in a bit more lending?
IAN MACFARLANE:
I think if the world is behaving normally, interest rates should be normal. And I think we are moving in that direction, and we will get there. But we certainly had an unprecedented period of low interest rates. There was a period of two or three years in the early part of this century, which had the lowest interest rates for a century.
MAXINE MCKEW:
Is that the aberration and we are now getting back to a more normal phase?
IAN MACFARLANE:
Yes. That's my view.
MAXINE MCKEW:
That won't make you popular out there.
IAN MACFARLANE:
Its not my job to be popular.
MAXINE MCKEW:
You said there will be the normal business cycles, how are you reading things now? I mean, how long might we go before we see some kind of down turn?
IAN MACFARLANE:
Well, there's no imminent sign of a down turn, but don't think that because we have had fifteen years of remarkable stability that that is now normal and you can expect that to continue for the next fifteen years. To me, just speaking from statistical probability, that would be extremely unlikely.
MAXINE MCKEW:
Governor, thank you for your time. Ian Macfarlane, thanks very much indeed.
IAN MACFARLANE:
Thanks you very much Maxine.
MAXINE MCKEW:
And that's Ian Macfarlane - As Australia's Reserve Bank Governor for the last ten years arguably the most powerful person in the country.
You will hear more from him in this year's ABC Boyer lectures, to be broadcast in November on Radio National.
And if you would like to hear more from him before then, we'll be putting up on the web an extended version of this interview - the complete hour-long conversation from which this program was made... the audio and the words.
The address: www.abc.net.au/sundayprofile
The interview with the Governor was produced by Peter Martin, with Sunday Profile's regular producer Jo Jarvis.
Next week at this time - Geoff Gallop - Premier of Western Australia until this year when in January he stepped down to battle to battle depression.
Talk to you next week.
BELOW IS A COMPLETE TRANSCRIPT OF THE INTERVIEW AS IT WAS RECORDED UNEDITED FOR BROADCAST:
MAXINE MCKEW:
Ian Macfarlane, Welcome to Sunday Profile.
IAN MACFARLANE:
Thank you.
MAXINE MCKEW:
Now you’re leaving the bank having spent the last 27 years of life there; you joined in 1979. How do you think you are going to cope with de-insitutualisation?
IAN MACFARLANE:
I think I’ll cope reasonably well. I did work at other places for eleven years before I went to the bank, so I do have some idea of life outside the reserve bank.
MAXINE MCKEW:
But it is a big chunk of your life in one place.
IAN MACFARLANE:
It is, but I’m actually looking forward to it because I thought ten years was the right length of time, and so I’m leaving with a positive view.
MAXINE MCKEW:
Nonetheless you’re only 60 and you know what they say now, retiring is for wimps.
IAN MACFARLANE:
Well I don’t like the word retiring and I think that we’ll discover that word will be used less and less as we go forward. More and more people will work longer, will shift from full time to part time work and will sort of gradually graze their activities down and I think that will be very good for the individual and very good for the economy.
MAXINE MCKEW:
Is that what you’ve got in mind?
IAN MACFARLANE:
Oh I don’t want to do nothing, and I don’t want to do a full time executive job, but I don’t have any specific plans, you can’t really make plans while you’re in the job, you’re not meant to be lining yourself up for the next activity.
MAXINE MCKEW:
What kind of things though might you get involved with? Perhaps board appointments, perhaps even writing?
IAN MACFARLANE:
Well I think that my ambitions as a writer will have been largely fulfilled by writing the Boyer lectures, and I don’t think I’ll be in a rush to take up my pen again, or at least not for quite a while.
MAXINE MCKEW:
Have you enjoyed that process?
IAN MACFARLANE:
Very much, very much. The thing I liked about it was that I was invited to do it and then I was given a deadline, and I think I would have had trouble if I didn’t have a deadline. I think I would have constantly been thinking, if only I could do this a third time, or a fourth time, I’ll eventually get there, I think.
There would be a tendency to let perfectionism get in the way of output, whereas if you’ve got a deadline, you feel much happier, I think.
MAXINE MCKEW:
Were you surprised when the call came? I think you’re only the second Reserve Bank chief, after Nugget Coombs, to have been asked to deliver the Boyer.
IAN MACFARLANE:
Yes, totally out of the blue, Donald McDonald phoned me, and asked me, and I immediately asked for a list of all the previous speakers, and I was so flattered by looking at that list, that I had to say yes.
I am in fact the sixth person with an economic background to give the lectures, in 50 years. So that’s probably about the right balance.
MAXINE MCKEW:
And do you feel that you’ve been able to re-visit some important points of economic history, in terms of the country?
IAN MACFARLANE:
Yes, well I think the six lectures will be held together by the fact that they do tell a story. It’s really the post-war economic history of Australia, plus a bit of political history, plus a little bit of discussion about how our views change of how economies behave and what economic policy can do and what it can’t do, so I enjoyed it because it does have a continuing narrative to it.
MAXINE MCKEW:
Lets talk about the job that you’re leaving.
When there was debate in the late 1990’s about who should open the 2000 Olympic games, the speculation was the Governor General, or the Prim Minister. And one writer to a newspaper suggested that it should be neither, it should be you, because you are the most powerful person in the country.
Now, I’m told that on hearing this at a function, the room exploded with laughter at the incongruity of this. Do you think though it’s right, that you have been the most powerful person in the country?
IAN MACFARLANE:
No I don’t and I’m embarrassed when I see these lists of some of the newspapers draw up of the most powerful people…
MAXINE MCKEW:
And you make the list all the time in the Financial Review.
IAN MACFARLANE:
And I’m always much higher there then I should be. The thing is that I have only got power, that’s perhaps too strong a word, over one aspect, which is interest rates.
MAXINE MCKEW:
But that’s quite a power though, isn’t it?
IAN MACFARLANE:
Yes, but even then I have to convince a board and I can’t just move this thing about willy nilly, according to my whims, I have to construct a very careful case, I have to argue my case publicly, I Have to get, if not totally support, significant support amongst those parts of the community that take an interest in monetary policy.
MAXINE MCKEW:
But you don’t have to consult the treasurer.
IAN MACFARLANE:
No, the board of the Reserve bank makes the decision and implements the decision.
MAXINE MCKEW:
Has the board ever rejected a case that you have put before it?
IAN MACFARLANE:
No they haven’t.
MAXINE MCKEW:
Do you only ever put one case, or perhaps two propositions?
IAN MACFARLANE:
No, we put one case to the board, but when I say the board hasn’t rejected a case that’s been put too it, that doesn’t mean they don’t have an influence. They have an influence in a number of ways, one of which is, a very important way, we have to explain the need for action or inaction, depending on the case, in the sort of language that an intelligent lay person can comprehend and find persuasive.
So that is a discipline on us.
Secondly, that might be such a discipline that it might influence the timing. In other words, you might feel, well there is a bit of a case to go now, but it is really not strong enough when you put it down on paper to be convincing to people who might be spectacle and may not have the same intellectual framework in their mind when they approach a problem, as we do.
MAXINE MCKEW:
So is the board then, the board of the Reserve Bank, a little bit like a jury, in that you’re trying to convince people, as you say, lay people?
You’ve got Say retailers, ordinary business individuals, apart from the expert economists of course.
IAN MACFARLANE:
I hadn’t thought of that analogy before, but I think there is some merit in it. The other way of thinking about it is that it is somewhat similar to a board of company. You don’t have specialist on the board of a company. They’re not executive directors, they may be a lawyer, or an accountant, or someone’s who a CEO from a totally different industry. So they are people who approach the issue with a lot of knowledge, practical knowledge, but do not necessarily have the same intellectual framework as the professionals who are proposing the action to the board.
MAXINE MCKEW:
Do things ever go too a vote?
IAN MACFARLANE:
Yes they do, in fact the Reserve Bank act specifically says that they should go to a vote, but very often it’s quite clear that’s its unanimous, so you wouldn’t bother to go to a vote.
MAXINE MCKEW:
Has it been rare in your ten years as governor?
IAN MACFARLANE:
No, it’s more common now to go to a vote than in the past.
Some of my predecessors have said that it never went to a vote in their time, but in my time it ha gone to a vote on a number of occasions and there is a reason for that. The reason is that until 1996, when the Treasurer and I signed the statement on the conduct of monetary policy, any proposal that went to the board, given that it was probably initiated by the government, had the approval of the board, and so the board knew that anything that come to them had the support of both the Reserve bank and the government, so it would be a very brave board to want to overturn that.
Whereas now, when a proposal comes to the board, the board is aware that it may not have the support of the government, and in fact the government may disassociate itself from it, or argue against it, at a later date.
So it is a much bigger decision now for the board, then it was prior to 1996
MAXINE MCKEW:
So putting the decision to the vote, does that help give you cover, if you like?
IAN MACFARLANE:
No, no, it goes to a vote almost automatically at the end of the meeting. You say; this is the recommendation, who would like to speak for it, who would like to speak against it, and most of the time there is unanimous agreement that the proposal be accepted.
The proposal is often to do nothing. On some occasions, a minority of occasions there may be members of the board who disagree with it, and they register their disagreement.
MAXINE MCKEW:
Do you want to tell us which times they were?
IAN MACFARLANE:
Well some of them are known, some of them have reached the press. In 2003 there was quite a bit of press coverage around the middle of the year, when the treasury wanted to lower interest rates, and we didn’t. So that was already in the papers, so I’m not saying anything new.
MAXINE MCKEW:
So the person most likely to have a disagreement would be the head of the Treasury?
IAN MACFARLANE:
No, not necessarily. No, sometimes he would be in complete agreement with me, and it might be someone else.
MAXINE MCKEW:
Lets go back over some of your early life. I mean, what’s interesting is that you earn more than twice what the treasurer earns, you’ve got a chauffeur driven car…
IAN MACFARLANE:
No I don’t.
MAXINE MCKEW:
You don’t?
IAN MACFARLANE:
No, Well I drive myself, unless if I’m going to alate night function or the airport, in which case someone will drive me.
MAXINE MCKEW:
I suppose, the point I’m making is that there is a difference between the way you live now, and your early years, which were very modest, weren’t they?
IAN MACFARLANE:
Yes well, I was brought up in outer suburbia, Melbourne outer suburbia, which was in those days, in the 50s, almost semi-rural. It was part of the great post war expansion of the Australian cities where houses where built in areas that didn’t have paved roads, or footpaths, or sewerage, or telephones, or what have you.
It wasn’t poverty or anything, but it was just a very common environment. Lots and lots of people that I know where brought up in that environment. The other thing that they didn’t have at that stage, they didn’t have anything near enough schools, so you either had to wait a year and go to school a year later then you weren’t meant too, or you had to go to school in a different suburb.
And then when high school came around, a lot of people went to schools that had no physical building, they rented a church hall here, and a masonic hall there, whilst the high school was being built.
MAXINE MCKEW:
You must have been pretty good though, you got to Melbourne High, the Selective High School.
IAN MACFARLANE:
Yes.
MAXINE MCKEW:
Was you’re mum pushing you?
I should mention that your mother was a war service pension because your father died in your youth.
IAN MACFARLANE:
Well yes, my father died just before I got to Melbourne High, but he was the one who was very keen on Melbourne High School. My older brother had been there and it was a very impressive school, so naturally my father was very keen that I go there as well.
The interesting thing is, when my brother went there, he was 17 years old than me, I think his choice, when he left central school, was to go to either Melbourne High or Dandenong high, that’s how few schools there where in the southern suburbs of Melbourne.
MAXINE MCKEW:
This is interesting, isn’t it, because we look back on the 50s and 60s and we, certainly political leaders feed into this rhetoric and say, they where the boom years, the years of bounty, of great prosperity, but they where pretty pinched, as you’re suggesting, wasn’t it?
IAN MACFARLANE:
Well I cover some of this in the Boyer lectures.
In terms of macro economic outcomes, the 50s and 60s where extremely successful; strong growth, low unemployment, and until towards the end of the 60s, also low inflation. So in terms of what I look at in my professional carer, they where a remarkably successful period. Economic historians have called it the Golden Age, but we forget that over the 50 or more years since the 1950s, even though the economy has gone up and down, and we have had all sorts of problems, we have had a lot of economic growth, and so we are now a lot richer than we where in the 50s.
So when we look back at the 50s, even though we admire the macro economic performance, we know that our living standards where a lot lower than they are now.
MAXINE MCKEW:
Not nearly as many material goodies.
IAN MACFARLANE:
Nowhere near, and as I said, even nowhere near as many educational opportunities. We where struggling to improve, and we did, we have improved over that 50 years, but it’s a bit like that Monty Python sketch of saying, Oh, the good old days. Do you know which one I’m referring to?
MAXINE MCKEW:
I was Born in Lake.
IAN MACFARLANE:
That’s right, Oh Luxury!
It seemed a perfectly happy time, but when you compared the material prosperity, or perhaps even access to hospitals and universities, it was quite primitive compared to today.
MAXINE MCKEW:
From Melbourne High, you went to Monash.
IAN MACFARLANE:
Yes.
MAXINE MCKEW:
With a Commonwealth scholarship?
IAN MACFARLANE:
Yes.
MAXINE MCKEW:
And what did you do, did you work through the holidays?
IAN MACFARLANE:
Yes I did, I did a variety of interesting jobs. In my first year, I worked as a builders labourer, including building the main building at Monash University, the Ming Wing.
MAXINE MCKEW:
Did you have a union ticket?
IAN MACFARLANE:
Ah No, I wasn’t asked for a union ticket. And I did a number of other building labouring jobs, but they where very casual jobs, and you would never know if whether you’re going to be hired next week, but the beauty of them was that they paid a lot more than being a sales person, or something.
Some of them where filthy jobs, you’d come home covered in cement dust.
MAXINE MCKEW:
Probably Asbestos as well.
IAN MACFARLANE:
Possibly, I don’t know.
MAXINE MCKEW:
Lets leap ahead. You certainly had years in Oxford, you where in Paris working for the OECD, and I gather you where rejected the first time you applied for a job at the Reserve Bank.
IAN MACFARLANE:
That’s correct. When I applied from university, I was asked to sit an attitude test, and they asked me how I would perform in certain situations, and what I preferred, and what I didn’t prefer.
And they obviously came to the conclusion that I had a bad attitude, and they sent me a letter saying, don’t bother to come in for an interview.
MAXINE MCKEW:
What do you think they were picking up on? Were you a bit chippy, were you?
IAN MACFARLANE:
I think they had brought a standardised test from some American testing firm, which was designed for large banks who would employ a multitude of tellers, and they were really screening for tellers, I think, because one of my colleagues who was an assistant general governor in the in the Reserve Bank, who had a very successful career, he was also rejected.
MAXINE MCKEW:
Did you get rid of the attitude test when you got into the bank?
IAN MACFARLANE:
Yes, yes Indeed. Well I couldn’t do it immediately because I wasn’t senior enough.
MAXINE MCKEW:
No, no, when you were elevated.
IAN MACFARLANE:
Yes.
MAXINE MCKEW:
You’ve made the point though, or you’ve said at one stage, you felt you were the least, intellectually distinguished person at the bank because so many of your colleagues had PHDs.
IAN MACFARLANE:
Oh no, I never went as far as that, no, no, not at all.
No, it’s true that some of my colleagues, particularly now, have absolutely stunning educations with PHDS from MIT, Princeton, Harvard, and all the rest. That’s true, but I was always very comfortable academically, I always liked to discuss academic, economic issues and more so than my predecessors. But the generation that’s coming in behind, are certainly much more academically qualified than I am.
MAXINE MCKEW:
Is, let’s talk about the setting of interest rates. Is it as much an art, something that is intuitive, as it is a matter of mathematical calculation?
IAN MACFARLANE:
A lot of people have said that, I think that it is certainly involves a lot more considerations than the academic literature, which suggests that, if you read a lot of academic thesis? On economic policy, you’d think that we have a big econometric model, and that we turn the handle on that, and that determined what we did.
That is certainly not the case, I don’t really place very much credence at all on economic models, but it is based on an awful lot of empirical evidence, and experience, and analysis of previous business cycles, and economic theory, and common sense, and scepticism, so I wouldn’t say it is an art rather than a science, I’d say it is an amalgam of the two.
MAXINE MCKEW:
One problem though isn’t it, it’s just what you’ve said, you’re looking at previous data, so you’re looking through a rear vision mirror.
IAN MACFARLANE:
That is the challenge, you’re right, you’ve put you’re finger on it, that is the challenge. Mentally what you have to be doing all the time is saying to yourself, when I look back in two years time, what can be the biggest mistake that I can identify being made now, and try and avoid that mistake.
Some people call that a risk management approach. Glen Stevens has written a lot on this subject, but you are trying to project yourself forward, and not rely exclusively on what has happened in the pat. Though even when you analysis the past, you can spend a lot of time understanding how it has changed, and how parts of it will continue to change in a particular direction, so there are a number for intellectual disciplines you can impose on yourself, which reduce the alliance on simply past relationships.
MAXINE MCKEW:
What about things like observation for instance, do you actually go out and look at how people are behaving economically, whether it’s in the markets, or in the shops, or what ever.
IAN MACFARLANE:
I don’t, but we do, for example, have a small team in each capital that spend their time talking to businesses, state governments, in some cases lobby groups, getting input and that does definitely feed directly into our decision making, as well as the more orthodox analysis of economic data.
MAXINE MCKEW:
You said just a minute ago that what you are trying to do is to you look ahead and try to judge the present, so that you’re not going to make a mistake. Can you pick one or two, perhaps even more, where you were really agonising about these things; you were awake at three in the morning about these things.
IAN MACFARLANE:
Well I don’t think I was awake at three in the morning over anything, fortunately. But there have been periods where it has been difficult. I mean a recent one, which I think was a tricky period, was in the ear 2003 where the world economy had come out of the mild 2001 recession and it seemed to have hesitated for a while, and certainly in America they were worried that they might actually end up in deflation, in other words, not only would they get rid of inflation but it would become negative, as it did in Japan.
And there was a sort of wave of pessimism that swept around the word, including central banks, and every central bank of substance lowered interest rates except one, which was Australia. And I think that one of the reasons we didn’t join in with everyone else is that we went through that discipline of saying, what do we think, in the Australian economy, would be the biggest mistake we could make now, if we put ourselves two years ahead? And we thought lowering interest rates into a housing boom, with an economy, i.e. the Australian economy, which was chugging along at a reasonably good interest rate, would be the biggest error you could make, so we didn’t do anything. So that was an example of looking ahead, and deciding not to do something, but looking ahead and deciding not to do anything, even though everybody else was.
MAXINE MCKEW:
That was in 2003. There was an earlier decision, wasn’t there, which was a real marker, and that was after the Asian economic collapse of 97, 98, when countries, such as Canada, New Zealand, pushed up rates and you didn’t.
Tell us about that time.
IAN MACFARLANE:
Well that was another interesting issue because that was when, again, everyone did something, we did nothing. Virtually every country at some point in 1997/98 raised rates, and we didn’t.
We had reduced interest rates in the first half of 97, and then the Asian crisis occurred, started around July 97, although we didn’t know it was a crisis when it first started, and it continued through till roughly the end of 1998.
And naturally, the Australian economy did suffer because we are more economically integrated into Asia than other pacific rim country, including Japan, i.e. a higher proportion of our exports go to Asia then japan’s exports, or New Zealand’s, or Canada’s or the US’s.
So we actually received a significant negative shock from the fall in those major Asian economies, and it flowed through to our exports and those exports fell, our export prices fell an our exchange rate fell.
MAXINE MCKEW:
The dollar was at what, 55 cents at one stage, wasn’t it?
IAN MACFARLANE:
Oh you’re memories probably better than mine.
MAXINE MCKEW:
I’ve been looking at the research.
But it was very difficult, wasn’t it, to go against the orthodoxy, which held that if you take rates up, your support the currency, which is what others did.
IAN MACFARLANE:
I think it was a finely balanced judgment and there where two things that influenced us. The first was that we did the arithmetic of how much of the fall in the exchange rate would pass through to inflation, an we didn’t think it would be all that big, we thought it would be a small enough of a rise that we could live with it, was the first thing.
And the second thing is, we developed a real scepticism on how effective it would be to raise interest rates purely to support an exchange rate. Now if you did that, if you put interest rates up to level, which was not warranted by the domestic economy, then international financial markets wouldn’t believe you, they would just know you’d have done it temporarily and you were going to bring it down again, in which case it would have no lasting impact on the exchange rate.
And so for those two reasons, we didn’t do it. But I have to say, that doesn’t mean we never would. If the fall in the exchange rate had really been large enough, then there would have been a case to do it, but it was all a matter of degree.
MAXINE MCKEW:
So this must have been a pretty nervy time?
IAN MACFARLANE:
Well the other issue at that time, was to make sure that a lot of people thought that interest rates might go up, and it was very important to get the rhetoric right.
And I have to say that during that period, Canberra was very helpful too. We sat down and talked to the Treasurer and the Prime Minister, and we all agreed on various things that should be said and should not be said.
MAXINE MCKEW:
Now is that unusual?
IAN MACFARLANE:
It was relatively unusual…
MAXINE MCKEW:
Because this was after the Charter of Independence, the exchange of letter you had signed with the treasurer in 1996.
IAN MACFARLANE:
Yes, but we weren’t talking about what we should do with interest rates, we were talking about what you should do, and what you should say when people say, oh, the Australian dollar has fallen.
MAXINE MCKEW:
So you were talking about the form of words, and the way you would, if you like, publicly enunciate what you were doing.
IAN MACFARLANE:
That’s right, because I was worried that there were a lot of people who had this view that if you’ve got a floating exchange rate, you don’t worry about the exchange rate, it goes wherever it wants too.
The problem is, that if you say that publicly, it’s a red rag to a bull, it’s virtually telling every speculator…
MAXINE MCKEW:
Given the state of the financial markets.
IAN MACFARLANE:
Yeah, It’s virtually telling every speculator; go short the Australian dollar, because no one is ever going to support it.
So we agreed, and it’s an agreement, which is by and large held very effectively since then, that Canberra, that’s the Treasurer and the Prime Minister do not talk about the value of the Australian dollar, which is very interesting because in the US, it’s the other way around.
In the US, the treasury talks about the value of the Australian dollar, and the federal Reserve board doesn’t.
In other words, what I’m saying is that you can’t have a lot of people doing it. You’ve got to work out who should do it, and who should agree on the most appropriate form of words, and that’s what we did.
MAXINE MCKEW:
Tell me, you just outlined there that you had a consensual agreement on how you would talk about this publicly, were there no reservations though, on behalf of the Treasurer, or the treasurer’s secretary at the time, about the approach you were taking?
IAN MACFARLANE:
No, no, during that Asian crisis, I think in terms of our attitude towards monetary policy, and our attitude towards what we would say about the exchange rate, and our attitude towards foreign exchange intervention, there was nothing resembling a major disagreement. There were little, tiny quibbles at the edges, but there always are.
MAXINE MCKEW:
Having prevailed then, during that, what is the, if there is one, what is the new orthodoxy that governs the setting of interest rates, when something like this is happening? When the currency is under pressure.
IAN MACFARLANE:
Well, the orthodoxy hasn’t really changed, the new orthodoxy in Australia since the early 90s, and in another number of countries, is this monetary policy framework called inflation targeting, where you commit to achieve, in our case, an average inflation point of two point something, that hasn’t changed.
I think what has changed is, in the early days on inflation targeting, a lot of countries were very fearful of a falling exchange rate because they felt that it would quickly fall through into higher inflation, and tended to act against it rather quickly.
Now, as time has gone by, not just our selves, but others, have recognised that domestic inflation is not as insensitive to the exchange rate as it used to be, so there is less inclination to reach for interest rates when the exchange rate falls. Even in some of the countries, which were very much inclined to do during the Asian crisis, they are less inclined to do so now.
MAXINE MCKEW:
I would like to switch if I could, to talk about the independence of the bank, you’ve touched on that and of course, you remember the famous comment from the then treasurer Paul Keating in the late 80s, early 90s, he said, “I’ve got the reserve bank in my back pocket”.
Was that true at the time, in some sense?
IAN MACFARLANE:
No, it wasn’t true.
MAXINE MCKEW:
But things were different, weren’t they?
IAN MACFARLANE:
They were different, but they weren’t that different. The way I like to characterise it now, and its taken me a lot of time and thought to come up with a sensible framework, under Paul Keating as Treasurer and Prime Minister, the Reserve Bank had what I would call conditional independence. In other words, we didn’t sit there waiting to be told what to do. The reserve bank initiated the changes in monetary policy, but it sought the approval of the government, which it virtually always got, then the changes would be made, we would put a press release saying what a good, important thing it was to do, and the government would put out a parallel press release, saying exactly how they approved of this particular change in monetary policy. And then of course the government never criticised the change in monetary policy because thy couldn’t, it was partially there monetary policy, so that was a period I call conditional independence.
If you’re working in the Reserve bank, it felt like full independence because you were initiating the changes that were going to be made. With the signing of the statement on the conduct of monetary policy, we have moved from conditional independence to full independence, whereby we don’t have to seek the approval of the government.
I mean, not only do we initiate it, we actually carry it through rather than simply initiating it, then getting government approval, and then carrying it through.
MAXINE MCKEW:
Were there moves in this direction well before 1996, before the formal agreement between the bank and the Treasurer.
What happened under Bernie Fraser’s time as governor?
IAN MACFARLANE:
Well what I was describing was essentially the period where Bernie was the governor and Paul Keating was the treasurer, and of course that was a very big improvement, in our view, the reserve banks point of view, a very big improvement of what had gone before. Because if you wind the clock back not that far, for example to the Fraser government, under the Fraser government, all the decisions on monetary policy were made by the monetary policy cabinet.
MAXINE MCKEW:
Within cabinet?
IAN MACFARLANE:
Yes.
IAN MACFARLANE:
With the governor sitting outside, most of the time, to hear the news. So the change from that state of affairs to the state of affairs under Paul Keating as treasurer and Bernie as governor, was a very big move in the direction of independence, compared to what had proceeded it.
MAXINE MCKEW:
Does that mean that it was unfair for John Hewson, who was leader of the coalition opposition at the time, in the early 90s as you know, he was running a campaign to say that the bank was not at all independent, it was being leant on politically. Was that unfair?
IAN MACFARLANE:
Well I think it was unfair, but on the other hand, because of some of the macho comments that Paul Keating had made, it’s not at all surprising that the opposition criticised the government for not allowing the Reserve Bank to be independent. In other words, during the Keating era, despite the fact that he made statements like I have the Reserve bank in my back pocket, on another occasion he said, they do as I say, that was not the reality behind it. He actually had a great respect for the Reserve bank, not enough to go as far as full independence, but certainly enough to go a long way in that direction.
MAXINE MCKEW:
In fact, as you know, through the 90s, rates were not eased until after the election in 1996, did that cause some tension between the then governor, Bernie Fraser, and as he was then, Prime Minister Paul Keating, that he thought you kept rates too high, too long?
IAN MACFARLANE:
Well I was not aware of it at the time, but I have seen reference to it in more recent books, but certainly at the time, O was not aware that there was tension. I think after the change of government, people looking back may reach that viewpoint, but I was not aware of it at that time
MAXINE MCKEW:
Lets look back on that period now. Should we be, to a certain extent, grateful if you like, for that prolonged recession because it did break the back of inflation?
IAN MACFARLANE:
We are getting into very sensitive area here, and I have to choose my words very carefully, but I think it is true to say that during my working life, we have had three recessions in Australia; one in mid 70s, one in the early 80s and the one in the 90s that you referred to.
After the first two recessions, we didn’t come out if with anything much to show for it. Inflation went down a bit, but it didn’t return us to being a low inflation economy. We had an expansion, but the expansion only lasted 7 years, or so.
The difference was that after the 1990s recession, we actually returned to being a low inflation economy, and as a result, we have been able to sustain a very long expansion, which is now in its fifteenth year, so I think viewed in that perspective, comparing the three recessions, the 90s was the one that was most beneficial for Australian economic development, compared to the earlier two.
MAXINE MCKEW:
So just tell me this, having got through the very troubled 80s and the dreadful fall out, and seen what the recession produced, I mean, was there a real determination in the top echelons of the bank, to rescue something out of the pain?
With all of you having been there through these others recessions, was there a really different mindset that took hold during this period?
IAN MACFARLANE:
Yes, I think there was. I think it’s not as though anyone there said, look we’ve got to get inflation down, lets go out and have a recession. That certainly didn’t happen. But there were a lot of economic forces in the late 80s that meant that recession was inevitable.
And its not surprising, virtually every country had a recession around about 1990, so there wasn’t anything particularly unusual about ours. But I think once we were in it, there was a determination, certainly at the reserve bank, And also I think, but perhaps not quite as early, there was also a determination by the government that they would like to come out with low inflation, and one of the pieces of evidence that I put forward to support this is that in 1990, 1991, I’m not sure which, it must have been… I can look it up when I get my copy of the Boyer and look it up, the government actually announced, this is Prime Minister Hawk announced a schedule for further reductions and protection.
MAXINE MCKEW:
Yes you are right, it was Prime Minister Hawk because that came out of the COAG process.
IAN MACFARLANE:
Yeah, and that was a clearly different approach. That wasn’t the old approach: oh, we’re in a recession, this is awful, you better go out and spend as much money as you can…
MAXINE MCKEW:
More protection.
IAN MACFARLANE:
… reduce interest rates immediately, and follow all of the guns towards propping up the economy immediately. This was a sort of, a much longer run view because obviously, reducing protection, or it was actually a forward plan, it wasn’t something that was done immediately, but it would be very beneficial for reducing inflation in the long run, but it certainly wouldn’t do anything to hold up the economy during a recession, so it seems to me that not only was there a view in the Reserve bank that we ought to come out of this with returning the economy to being a low inflation economy as it had been in 50 and 60s when it had performed so well, I think there was also an agreement among influential members of the government, that that should be the agreement.
MAXINE MCKEW:
So, as you say, there was this consensus that they weren’t going to miss this opportunity, so in that sense, can we say it was the recession that we had to have? In that we almost needed a crisis to get tough.
IAN MACFARLANE:
Well, I’m not sure quite what that statement was meant to encompass. My understanding is that it had a more limited meaning, and it sort of meant that there were so many imbalances in the economy in the second half of the 80s that an recession was inevitable, that didn’t necessarily mean that the recession would then bring some beneficial side effects.
MAXINE MCKEW:
But everything you’ve described has helped give us the prosperity we’ve all enjoyed for the past decade.
IAN MACFARLANE:
Well, a lot of other things as well. I think that what I’ve described has been a necessary part of getting inflation down again. Basically, no country has ever got rid of an entrenched inflation problem without having a recession.
MAXINE MCKEW:
So those pillory, for the pain of the 1980s recession, you’re suggesting that something else is appropriate if we are looking back on this bit of history?
IAN MACFARLANE:
Well, all I can say is that people ought to read the Boyer lectures. I don’t think I come out with a clear answer to that election, other than I do think that period has been misunderstood.
I mean it wasn’t a happy period, I’m not trying to claim that that period was a happy period at all. I’m also not tyring to claim that it was all carefully planned, it wasn’t carefully planned, nor would I suggest that it was well forecast. The fall in output was bigger than we thought…
MAXINE MCKEW:
… so there were certainly things the bank got wrong?
IAN MACFARLANE:
Yeah, and the fall in inflation was bigger than we thought, at one stage we thought it was just going to be like the 1982, 1984 recession. So I don’t want to give the impression that it was carefully planned, and we knew it was going to be successful, and we did a cost0benefit analysis and decided that the short run cost was worth the long run benefit, things never run as smoothly as that.
MAXINE MCKEW:
The fact is, we did come out of this period with low inflation and for all the reasons you described, and yet we have political leaders that keep using recession as a weapon. It’s being used by the government against Labor, and you’ve even got the Labor party wanting to re-write its role in all of this, does this make any sense?
IAN MACFARLANE:
Well, lets forget the two parties we have in Australia; the Labor party and the Liberal party…
MAXINE MCKEW:
… that would be nice.
IAN MACFARLANE:
… and go to England. The same thing is being played out in the UK, except the parties are reversed. The Blair government, the Blair Labor government, which has been in office during the period of economic stability, is able to score point after point against his predecessors, the Conservative party, who were in office during the turbulent period and in fact, the period when inflation came down.
So I think all we are observing is the enormous advantage of being the incumbent during a period of stability, compared to being the party that proceeded the period of stability.
MAXINE MCKEW:
Speaking of point to point, when where Australian interest rates at their highest in real terms?
IAN MACFARLANE:
In real terms, no, I’ll tell you in normal terms, it’s not as easy to answer that as it sounds, it’s not as easy because there were four occasions when the main indicator of short term interest rates, which was the bill rate, there were four peaks in that. One very briefly in 1974, one in 1982, another one in 1985 and another one in 1989, and they’ve all been…18, 19, 29, 22, 23… I don’t know which one you would actually give the prize to being the highest; it’s either 1974 or 1982.
MAXINE MCKEW:
In 82, I’ve got the figures in front of me, I’m playing games here, it’s 21.4%, that was the 90 day bank bill rate in 1982.
IAN MACFARLANE:
That’s the normal rate, and in 1974, depending on how you measure it, you can actually get figures as high, for a few days, as 25%, so it’s not as easy as that to actually identify the peak.
The other issue is that if you used a different interest rate, and you used a mortgage rate, there were also peaks in the mortgage rate, but the highest peak in the mortgage rate was 1989.
So in terms of the bill rate, it’s probably 1982 or 1974. In terms of the mortgage rate, it’s 1989.
MAXINE MCKEW:
So the bill rate in 1982, that was when John Howard was Treasurer and Malcolm Fraser was Prime Minister.
IAN MACFARLANE:
Yes.
MAXINE MCKEW:
And a lot of mortgages then were capped at what, around 13 per cent?
IAN MACFARLANE:
No, I think they were even lower then, I think in 1982, you’re testing my memory a bit here, I think in 82 the mortgage rate was still set by the government, the reserve bank in consultation with the treasurer set the mortgage rate. I don’t think it was 13, but it might have been, but it was certainly centrally determined, and by 1989, new mortgages were freed up, but existing mortgages had a cap of either 13, or 13 and a half per cent on them.
MAXINE MCKEW:
But in 1982, certainly rates were highest under John Howard, professional rates?
IAN MACFARLANE:
Yes, the bill rate was higher in 1982, and it was higher I have to say in 1985 then it was in 1989.
MAXINE MCKEW:
Peceptions are interesting aren’t they?
IAN MACFARLANE:
Yeah, so there have been two clear situations since we have had good measures of short-term interest rates; 1982 and 1985, where they where higher then 1989.
MAXINE MCKEW:
Tell us then how you, or how the bank regarded the rhetoric during the last election campaign. We do know that the RBA in fact made objections about some of the advertising, and because RBA was listed as a source, these are objections that went to the electoral commission.
IAN MACFARLANE:
Well on the general issue on what a party can say on an election campaign, they can basically say, they can make any claim they want. They can say we are better at this then our opponents, what it is; health, education, interest rates than our opponents, and there is no body that can adjudicate that can say, you’re not allowed to say this, or you can say this.
In a democracy, if you think the claims of one party is wrong, then it is up to the other party, or the press, to present the counter argument.
The particular ting that you’re referring to was particular cards that were put in peoples letter boxes, which had an error in them, whereby simply the numbers of the interest rates had been sourced from the reserve bank, it sounded as though the whole argument had been sourced from the reserve bank. And those were the one, I think it only occurred in a couple of electorates, and it was probably due to an error, someone had forgot to put the asterisks where the footnote was suppose to refer to, and we asked for those to be no longer issued, after having consulted the Australian electoral commission.
MAXINE MCKEW:
Are you sure it was an error?
IAN MACFARLANE:
Well I think it was because it only happened in most, two adjoining electorate sin Sydney, and I assume it was probably only an error.
MAXINE MCKEW:
But the claim made by the coalition was that rates would always be lower under their rule, under Labor. I mean, you were in charge of the interest rates at the time. It warned of mortgage rates under Labor being of ten per cent, would the bank ever have felt the need to push mortgage rates to ten per cent under a Labor government?
IAN MACFARLANE:
I am not aware of that particular claim.
I do know that there claim was that interest rates would be lower under the coalition then under Labor, and we were sort of disappointed because this seemed to imply that the central bank did not have the independence to set interest rates.
However, if you were to say that, the government would respond by saying, no, we know that the central bank is independent, what we are really saying is that the totality of our policy, particularly our fiscal policy and other things, will provide a background that would be more conducive for the reserve bank.
MAXINE MCKEW:
But they didn’t say that.
IAN MACFARLANE:
Well when challenged, they did. When people challenged the Prime Minister…
MAXINE MCKEW:
…Well I would argue that that was a nuanced message that was somewhat lost in the campaign.
IAN MACFARLANE:
Well in politics you don’t go for nuanced messages, you go for very bold claims, and when people dispute the bold claim, then you revert back to more nuanced arguments.
MAXINE MCKEW:
Was this the great con trick though? As you know, the Prime Minister and the Treasurer like to boast about the RBA’s independence, but they were happy to campaign last time round that it was they who controlled interest rates.
IAN MACFARLANE:
Yeah, I’m not so sure that they campaigned that they controlled interest rates, because as I said, the moment you confronted them they would say, no weren’t claiming that, and we don’t have to claim that for our argument to still be logically defensible.
And I think that’s what their position would be.
I mean, politics in hard game, with an election coming up, various bits of research are done, and they grab on to whatever they can grab on to.
MAXINE MCKEW:
Did you think their line was defensible, within the context of an election?
IAN MACFARLANE:
Ah, well it was logically defensible, yes. It was a logically defensible position. It was disappointing to us because the bold claim, rather than the more nuanced one, was probably accepted by some members of the community, and if they accepted the bold claim, that indicated that they weren’t aware that we had an independent central bank.
But their position, the government’s position was logically defensible.
MAXINE MCKEW:
Did you ever, were you ever tempted, at any stage, to speak out about that issue, yourself?
IAN MACFARLANE:
No.
MAXINE MCKEW:
Either during the campaign, or after?
IAN MACFARLANE:
No, well, I have spoken after, this isn’t the first time that I have mentioned that we were disappointed that interest rates were not only a feature of the campaign, but they were a major feature of the campaign from day one.
But there was no way that I could speak out without effectively becoming a third force in the election, and that would not have been in the long term interests of the reserve bank or Australian monetary policy at all.
MAXINE MCKEW:
So you did weigh the issue up, you did consider it?
IAN MACFARLANE:
Well, we sought advice from the electoral commission specifically about those flyers that were handed out, and they gave us a long answer and they went through a whole lot of other issues, and that was consistent with the view that I expressed: that neither they, nor us, nor anyone else is the adjudicator in an election.
MAXINE MCKEW:
It’s a fine balancing act, isn’t it?
IAN MACFARLANE:
Well, I think, I have no doubt that that was the right decision not to get involved, I think that would have been entirely the wrong decision, and I think in the long run, we would pay a heavy price for that and it would have more to politicise the Reserve Bank, then the claims themselves did.
MAXINE MCKEW:
And the appropriate way to deal with it, as you are now, an as you did subsequent to the election.
IAN MACFARLANE:
Yes, yes, I have no doubt that we did the right thing, which was, where a fact was being misrepresented, we got that remedied. Where an opinion was being put forward, we were disappointed to see that opinion being put forward, we did nothing about it because either party is allowed to put forward opinions that we disagree with.
MAXINE MCKEW:
I take your point though when you say that to enter the debate at that point, you would have been seen as a third force. On the other hand, some would say that, as you are independent, it is up to you to demonstrate that independence.
IAN MACFARLANE:
Yeah well I think that there are a lot of people who don’t understand independence. I constantly find, particularly in the media, people who think that to really show you’re independent, you’ve got to be out there, constantly making comments on various aspects of the economy and government policy, and that the highest form of independence is to be attacking the government, whichever government is in office, that is not a sensible form of behaviour.
You enter an agreement with the government, where the government says, we respect you’re right to make monetary policy, and as a quid pro quo, we are not to set ourselves up as some sort of super financial commentator. The only time we are to refer to government policies, would be if they were directly impinging on our ability to make monetary policy.
So my life is actually of, whenever I give a speech, you know, take questions and answers. Or when I go to a parliamentary inquiry, consists of trying to hose down the media’s hopes that I would say something very controversial about some particular government policy, which would therefore be written up as conflict between the reserve bank and the government.
I mean there are little conflicts, but they’re only little ones and they are clearly defined by the terms of independence. The system has worked very well, but it would not work very well if I took it upon myself to be what I think the media would like me to be, which is a general commentator on all matters economic.
MAXINE MCKEW:
We’ve talked about point of recent history, lets just finish this up by talking a bit about the future.
Are you optimistic about the future of the country? Its economic and social future?
IAN MACFARLANE:
Yes, I am optimistic and I have always been optimistic in a time when there weren’t many optimists in the economics profession.
In the 70s and in the 80s, and I think even through parts of the early 90s, there was a binding pessimism on economic matters, and people were constantly saying; we’re sinking behind the rest of the world, and I was basically, always quite optimistic.
MAXINE MCKEW:
Why? What were you looking at?
IAN MACFARLANE:
I thought that we were slipping, to the extent that we were slipping behind, it wasn’t because we had bad policies, we did have a period in the 70s where we had terrible policies, but I thought we were getting a lot of our policies into order, and it couldn’t be done in a stroke, it had to be done over a long period, and I thought that the policies and the institutions, in the end, would help us through.
Secondly, I thought that to the extent that we had slipped in the international rankings, it was because in a long period over about 80 years, our terms of trade had deteriorated.
Now, what that means is that the prices of our exports had fallen, relative to the prices of our imports, and that had a big impact over such a long period, and people were saying, we were a quarry, and a farm, and whole lot of pessimistic conclusions were drawn, and I myself, felt that that would not go on forever, and of course it hasn’t.
And since about, I would date it 1985, that long term trend has reversed, and now its our import that fall in value, relative to our exports, in other words, the purchasing power of is what we produce is going up. For 80 years our purchasing power was going down, now our purchasing power is going up, and there are good long run reasons to believe that that will continue, and if you want to summarise it in one word, that word is China of course.
MAXINE MCKEW:
So, their demand and what we have to sell them, in terms of raw materials?
IAN MACFARLANE:
So what they supply to us goes down in price, and what we supply to them goes up in price.
MAXINE MCKEW:
That’s a good way to have things.
IAN MACFARLANE:
Yes, and these things vary from year to year, but it’s the long run trends that matter. And we come off a period where the trend was down for 80 years, and we’ve now entered a period where the trend has been going up for nearly twenty, and will continue, not necessarily ever year, but on average to go up.
MAXINE MCKEW:
Does that mean we are almost recession proof?
IAN MACFARLANE:
No, I don’t think so. I think there will still be a business cycle and we have never gotten rid of it to date, and you would have to be a great optimist to think we will get rid of it completely.
But on the other hand, I think the economies are more stable than they use to be.
MAXINE MCKEW:
Economies, broadly?
IAN MACFARLANE:
Broadly.
Macro economic economies are more stable in that the swings aren’t as big as they use to be and there are a lot of very good reasons why that is the case.
MAXINE MCKEW:
Nonetheless, I gather that you’re still worried, if you look internationally to interest rates, do you think they could b higher to reign in the lending?
IAN MACFARLANE:
Well I think the world undertook a rather risky experiment in having interest rates as low as they did in 2003, 2004, where we had Japan with zero interest rates, the US with one per cent interest rates and Europe with two per cent interest rates.
And I am very pleased to see that they are now being normalised, in the US they have nearly completed the normalisation, Japan’s barely started and Europe is definitely returning to normal.
I think if the world is behaving normally, interest rates should be normal, and I think we are moving in that direction, and we will get there. But we certainly had an unprecedented period of low interest rates, in other words, there was a period of two or three years in the early part of this century, which had the lowest interest rates for a century.
MAXINE MCKEW:
Is that the aberration and we are now getting back to a more normal phase?
IAN MACFARLANE:
Yes, that’s my view.
MAXINE MCKEW:
That won’t make you popular out there.
IAN MACFARLANE:
Well, its not my job to be popular.
MAXINE MCKEW:
You said there will be the normal business cycles, how are you reading things now? I mean, how long might we go before we see some kind of downturn?
IAN MACFARLANE:
Well there’s no imminent sign of a down turn, but I have made the statement several times, don’t think tat because we have had 15 years of remarkable stability, that that is now normal, and you would expect that to continue for the next 15 years. To me, that is just, speaking from statistical probability, that would be extremely unlikely.
MAXINE MCKEW:
I want to ask you about how you see Australian society, and I am coming to an end, just the last couple of questions.
To go back to where we started in this interview, you talked about growing up in a fairly modest home, your mum raised four of you in the 50s and 60s, but you were able to go to Melbourne High, go to Monash on a scholarship, rise to the very top of the Reserve Bank.
Do you think it’s going to be as easy, or is it as easy for someone today, coming from that background to still come through, climb the social ladder?
Do social inequalities worry you a bit?
IAN MACFARLANE:
Well I think it is as easy. I mean, there are a lot of areas that were more sheltered, and more privileged than in the 50s and 60s.
When I was growing up, you couldn’t get into stock broking unless your dad, or your uncle was a stockbroker. I think in areas like that now, it’s just an open slather, its an meritocracy.
So, I think I terms of, have we got a class based society, or have we got a meritocracy, I think that we have now is more meritocratic, and less classed based than what we had 50 years ago.
MAXINE MCKEW:
And that’s a good thing?
IAN MACFARLANE:
Oh yes, I think it’s a good thing.
MAXINE MCKEW:
So, fewer rigidities?
IAN MACFARLANE:
Yes, yes. I mean we are only talking about one dimension here, but on that one, I think it is more meritocratic than classed based, not that we were ever a very classed based society by world standards.
MAXINE MCKEW:
What about opportunities though, for people to start a family, get into the housing markets, all those kinds of things. Are you worried about that?
IAN MACFARLANE:
Oh, I’ve spoken at length on that. I think that one of the great disappointments of the long expansion and the low interest rates that go with it, was that house prices doubled and I think there were some speculative elements there too that made it worse.
I think Australia, as a whole, devotes to much resources to building houses, and building up the prices of houses, but I’ve been on the record saying that on many occasions, so that’s a broken record.
MAXINE MCKEW:
Governor, thank you for your time.
Ian Macfarlane, thanks very much indeed.
IAN MACFARLANE:
Thanks you very much Maxine.
NOTE: This transcript was typed from a recording of the program. The ABC cannot guarantee its complete accuracy because of the possibility of mishearing and occasional difficulty in identifying speakers.
