Working Papers

The Reserve Bank and Transparency

The RBA’s on-going problems with transparency are highlighted in this story:

The bank spent the week fighting communications battles. The most serious have been allegations in the market that an American analyst received a selective briefing of the RBA’s thinking before the board meeting last Tuesday.

The RBA is emphatic that the analyst, Regina Schleiger from Medley Global Advisers, has not visited the bank recently and that the bank’s policy of not talking to anyone in the lead-up to board meetings has been strictly kept.

The concern that confidentiality had been breached was created by the US advisory firm switching its recommendation on the direction of Australian interest rates late in the week before the board meeting.

Clients, who pay in excess of $100,000 a year to subscribe to the Medley service, were told late last week that the organisation was 100 per cent certain that Australian rates would not be raised.

The firm had previously argued that the RBA would raise rates at least twice more, so the change in view captured attention. One of the clients said Medley had been trying to build its international profile and was trying to impress US clients that it had good contacts in Australia.

“You had to believe they had the good oil,” he says.

The organisation would not have exposed its reputation by basing such advice on a hunch, according to market operators.
The market responded immediately. Before the newsletter, the market estimated that there was a 70 per cent likelihood of the RBA raising rates. This fell to a 50-50 probability afterwards. A trader with 1000 futures contracts on the Australian cash rate would have made $250,000 overnight, and many did.

The willingness of the market to believe that a private advisory firm had been backgrounded by the RBA is understandable, since it is well known that the RBA backgrounds selected economics writers.  In meetings with financial market clients, I am often asked if I have ‘contacts’ within the Bank.  While I know quite a few people at the RBA, and my discussions with them are often helpful in understanding monetary policy developments in a very general way, I would never expect to receive specific information about the outcome of a Board meeting, or information about the Bank’s policy bias that was not already public knowledge.  When I explain this to clients, they often look disappointed, but anyone who tells them otherwise is not to be believed.  I have also sometimes been accused of ‘sour grapes’ in arguing that the RBA needs to clean-up its act on transparency issues, as if my real complaint is that I am not an ‘insider’ myself.

Most of these supposed insider relationships only exist in the fevered minds of financial market participants, but these perceptions highlight the fact that the RBA has a big problem with communication and transparency.  The Bank would make life a lot easier for itself if it formalised processes for disclosing its policy bias and Board deliberations.

Incidentally, you did not have to pay $100,000 to Medley to know that the RBA would keep rates steady last week.  You just needed to be a client of Action Economics!

posted on 11 April 2005 by skirchner in Economics

(4) Comments | Permalink | Main

| More

Next entry: Outsourcing Financial Market Journalism

Previous entry: The Reserve Bank and the Electoral Commission

Follow insteconomics on Twitter