DIMITRI BURSHTEIN & PETER SWAN: The RBA’s independence is more of a shield than a safeguard

It has become fashionable to praise the independence of the Reserve Bank of Australia by contrasting it with the overt political pressure applied by US President Donald Trump to the US Federal Reserve. The contrast may be comforting, but it is not entirely accurate.

Central bank independence, like international law, is better understood as a convenience than a constraint. Both are elegant in theory but conditional in practice, sustained less by legal entrenchment than by the willingness of powerful actors to act as if the rules apply to them. When that willingness fades, the limits of the idea are quickly laid bare.

Australia’s political class is typically more disciplined in tone than its American counterpart, but restraint should not be confused with abstinence.

Monetary policy has long been influenced through appointments, signalling and calibrated public commentary. Influence does not require spectacle. It works just as effectively through quiet understandings about where ultimate authority lies.

Recent events underscore the point. The attendance of the RBA governor at Treasurer Jim Chalmers’ productivity summit was either a lapse of judgment or an implicit concession that the bank’s independence is more rhetorical than real. Either way, the signal was unhelpful.

Central bank heads are not required to attend political forums convened by the fiscal authority. Doing so inevitably conveys a sense of institutional alignment.

That impression is compounded by the statutory presence of the Treasury secretary on the RBA board. Whatever is said about independence, this institutional design suggests a more qualified reality.

At its core, the idea of central bank independence rests on a conceptual confusion. Modern democratic government is grounded in the separation of legislative, executive and judicial power; a doctrine articulated by Baron du Montesquieu to prevent arbitrary rule.

That architecture was designed to divide political authority, not to license a fourth autonomous branch of governance composed of unelected officials exercising vast economic power while claiming insulation from democratic control.

Unsurprisingly, neither the Australian nor the US constitution mentions a central bank or an administrative branch. Both the RBA and the Federal Reserve are statutory creations, exercising authority that is conditional and revocable.

In Australia, this reality is explicit. The Reserve Bank Act provides for operational independence, but that independence is mediated through a statement of expectations agreed between the treasurer and the RBA governor. Monetary policy is delegated, not surrendered.

Recent amendments to the RBA Act, preventing the treasurer from directing the Treasury secretary on monetary policy, do little to change that reality. They are largely theatrical. A mafia boss does not need to issue written instructions to an underboss. The power to hire and fire communicates enough.

Formal powers matter precisely because they rarely need to be exercised. The government retains the ability to remove the governor and board members. That authority alone shapes incentives and behaviour. Independence survives so long as it is tolerated by the government.

Defenders of central bank independence rarely confront the obvious question: independent from whom, and accountable to whom? In a democratic system, public power must ultimately answer to the public. Independence without accountability is not a safeguard; it is an abdication. History suggests that institutions freed from consequence do not rise to excellence but slide, predictably, into error and overreach.

In practice, the most binding constraint on the Reserve Bank is neither legal nor political. It is economic. Inflation, bond markets and voters impose discipline when institutions do not. A central bank can withstand political criticism for a time. It cannot indefinitely defy economic reality.

This points to a deeper problem. As in the United States, Australia’s core weakness is fiscal rather than monetary. Persistent deficits have been normalised. The Reserve Bank has not merely accommodated this shift; it has helped mask it. Prolonged low interest rates softened the consequences of fiscal indiscipline and allowed governments to defer difficult decisions.

Inflation is the inevitable result, and it is a blunt and regressive instrument. It erodes real wages and savings, redistributes wealth away from the prudent, and benefits heavily indebted governments and asset holders. Its costs are diffuse, opaque and politically convenient.

The fiction of central bank independence plays a crucial role in this arrangement. It allows elected governments to distance themselves from outcomes they quietly demand and rely upon, while central banks claim technocratic neutrality as they underwrite the consequences of government fiscal failure. Independence, in this sense, has become less a safeguard than a shield.

The real danger is not that the Reserve Bank’s independence is being eroded. It is that independence has been elevated into a shibboleth, invoked to conceal fiscal irresponsibility and to deflect democratic accountability when it matters most.

Dimitri Burshtein is a senior director at Eminence Advisory.

Peter Swan is professor of finance at the UNSW-Sydney Business School