Late last month, Ben Bernanke held the first ever press conference by a chairman of the US Federal Reserve Bank.
For more than an hour, he took questions about the Federal Open Market Committee’s decision to leave interest rates unchanged and commented on the economy in general.
In contrast, after this month’s Reserve Bank of Australia (RBA) board meeting, Governor Glenn Stevens released a press statement detailing the reasons behind the decision to leave interest rates on hold.
There was no media conference or any opportunity to ask questions in response to the statement.
This raises an obvious question: is the RBA sufficiently transparent?
The answer to this question is, of course, rather complicated.
Measuring accountability
The level of transparency at the RBA can be measured according to how well it communicates its goals, operations, and strategies to the public.
For example, we know that the RBA board meets on the first Tuesday of every month (except January) to decide if interest rates need to be changed.
The RBA informs the public of its decision with a media release at 2.30pm, and two weeks later the minutes of that meeting are released to the public.
Both these events are covered extensively by the media.
These are all hallmarks of being open and transparent, and the RBA has increased the level of transparency substantially since it took the first step by announcing changes in interest rates for the first time back in January 1990.
Today, the RBA is among the top 10 most transparent central banks in the world.
A recently published survey gave the RBA a score of nine out of 15 for transparency, based on 2006 data, ranking it at 14th in the world.
However, the RBA’s December 2007 move to publish the board’s minutes and announce the monetary policy decision on the meeting day should increase the RBA’s score to 11 out of 15 and put it the top 10, in line with the US Federal Reserve, European Central Bank and Bank of Canada.
In comparison, the Swedish and New Zealand central banks are the most transparent, with scores of 14.5 and 14, respectively, whereas the central banks of Yemen, Libya, Saudi Arabia, Bermuda and Aruba barely rate a score.
Among our neighbours the central banks of Indonesia rates an 8.5/15, Singapore 6.5/15 and China 4.5/15.
So in world terms, the Fed and the RBA are relatively similar and among the most open, with Bernanke and Stevens both being responsible for increasing the levels of transparency of their respective central banks.
Opening the vaults
Bernanke’s chairmanship has been characterised by increasing the access and opportunity the public has had to ask questions relating to the Fed’s policy directions.
Bernanke has appeared at plenty of congressional hearings, some town hall-style meetings, had a few television interviews, and given numerous public speeches where he takes questions from the audience.
However, taking questions directly from reporters directly after a policy meeting is certainly a new direction.
Likewise, Stevens’s governorship has also been characterised by a similar increase in access and transparency levels. His interview on Channel 7’s Sunrise is last year is a good example.
However, transparency is more than just the communication of information.
The RBA’s capacity to affect the economy depends on its ability to influence public expectations of future interest rates.
The public’s understanding and learning of current and future policies is critical for the effectiveness of monetary policy. Hence, any words spoken by the governor must be taken in this light.
Stevens’ _Sunrise _interview is better seen as the governor taking the opportunity to increase the public’s understanding of the RBA and how monetary policy will be implemented.
Stevens explained in the interview that the property market was what people should be worried about the most. The RBA then raised rates by 25 basis points in April and May, 2010. This left the public in no doubt that further increases in interest rates could be on the cards if house prices kept rising.
Contrasting contexts
How much transparency is required to communicate a credible signal on interest rates to the public also depends heavily on the characteristics and state of the economy.
About 70% of housing loans in Australia are variable rate loans. So the majority of the public are aware of the implications of a change in monetary policy as it affects their disposable income relatively quickly.
However if, as in the rest of the world, the majority of housing loans are fixed rate then public sensitivity to monetary policy changes is much lower, as disposable income is not as rapidly affected.
This is one reason why the Reserve Bank of New Zealand is one of the most transparent in the world. Over 70% of housing loans are fixed and the RBNZ has to move interest rates much further than the RBA to achieve a similar result.
The stage of an economic cycle a country is in also has an effect on transparency.
With US unemployment at 8.8%, interest rates effectively zero, huge debt levels, little economic growth, and a large majority of long term fixed rate housing loans, Ben Bernanke is left with very few options to influence public expectations of future interest rates.
So a media conference after a FOMC meeting makes perfect sense to further enhance transparency.
Australia, on the other hand, is in the enviable position of having low unemployment, historically average interest rates, low debt levels, average economic growth and a large majority of variable rate housing loans.
So Glenn Stevens does not need to or have to resort to having a press conference after a RBA board meeting. The level of transparency is currently sufficient to have the desired effect on the public’s future expectations.
Mind you, I and the rest of the media would love to have the opportunity to question Glenn, like Ben.