Central Bank Purposefulness, Take Two

I wrote about central bank purposefulness a couple of months ago, and on reflection I was not happy with what I had written. The argument was buried under too much scaffolding. This is a second attempt, stripped back to what I actually wanted to say. The core argument is that a central bank should follow three principles:

• Don't be a cowboy;
• No surprises; and
• Stay in your lane.

The first is about how the Bank moves, the second about how it communicates, and the third about what it comments on. Each is a piece of the same underlying point. The Bank's credibility is the asset that makes its instrument work, and credibility is built and lost through the ordinary discipline of how the institution carries itself. Cowboy rate setting depletes it. Surprises deplete it. Editorialising on matters outside the mandate depletes it. Everything else in the post is consequences of those three.

Should the RBA Raise Rates in May 2026

The Monetary Policy Board meets on 4 to 5 May. The cash rate sits at 4.10 per cent after two consecutive 25 basis point hikes in February and March, the first reversals of the easing cycle that ran through 2025. Markets are pricing roughly a 60 per cent chance of a third hike. The case for or against another move depends on what the data say about the underlying inflation problem, not on what borrowers would prefer to hear.

The framework set out in Inflation: Causes, Diagnosis and Cures is a useful discipline here. Diagnose first. Decide second. Skipping the diagnostic step is how public commentary about monetary policy generates more heat than light. So let me work through the diagnosis using the five drivers the framework identifies, then turn to the policy question.

Inflation: Causes, Diagnosis and Cures

The Bloomberg Commodity Index, a broad-based benchmark covering energy, metals, and agricultural commodities, is up at the moment. In the past this index has been correlated with periods of higher inflation.

Weekly Energy Price Update

 Spot prices

Stagflation: the Lead in Australia's Saddle

Previously I argued that the Reserve Bank's credibility is a critical defence against a repeat of the 1970s stagflation experience. That is true, but it is only half the story. The other half is the architecture around the central bank, which determines whether that credibility can do its work. 

This post is about the broader architecture necessary to manage inflation, told through the question that the set of charts below forced me to confront: Why did Australia take so much longer than everyone else to get inflation back under control after the 1973 oil shock? The UK, Japan and Italy all had an inflation peak higher than Australia's in the wake of the oil shock. All were broadly back towards pre-shock inflation levels in three to eight years. Australia took 15+ years. 

Stagflation

I grew up with stagflation. In the 70s and 80s it was the word everyone reached for, here and abroad. Inflation and unemployment were both pushing towards double digits at times. The misery index piling up month after month. And it stuck around. The United States got out because Paul Volcker (Chairman of the Federal Reserve 1979-1987) broke the back of US inflation at the cost of a brutal global recession in the early 1980s. Australia took longer to reset, and only fully closed the chapter with the recession we had to have in the early 1990s.

What Australia Owes Itself

The Principle Is Simple

Australia's minerals belong to the nation – the people. The Commonwealth owns Australia's offshore petroleum resources. The States own onshore minerals – coal, iron ore, gold, lithium, every extractable resource beneath Australian soil. Private companies do not discover resources and then own them. They apply for the right to extract resources that already belong to the nation, and that right should only be granted on the basis of a reasonable return to the people who own them.

This principle has been watered down. The Federal Government has allowed private companies – many of them foreign-owned multinationals – to extract finite, irreplaceable public wealth at scale while returning far less than the value of what is being alienated, and far less than Norway, the United Kingdom, and other comparable jurisdictions capture. Six of Australia's ten liquefied natural gas (LNG) export facilities pay no royalties and little or no Petroleum Resource Rent Tax (PRRT), despite generating billions in annual export revenue. 

The Australian Taxation Office's (ATO) Corporate Tax Transparency data shows the oil and gas sector has been a systematic low payer of PRRT relative to its revenue scale. That pattern has prompted repeated policy intervention to secure a more timely and minimum return from the offshore LNG industry. These are not normal business profits on private assets. They are returns on resources that belong to Australians, and Australia is not receiving a fair share of them.

This is not an argument about government needing more money to spend. It is a prior question: on what terms should a government grant private companies the right to extract and sell public assets? The answer should be straightforward – only on terms that deliver a fair return to the owners. Norway has built a sovereign wealth fund worth \$1.9 trillion, roughly \$350,000 per citizen, on exactly that basis. The question for Australia is not whether to insist on fair terms. It is how to get there from where we are now, given two previous failed attempts and constitutional arrangements that complicate comprehensive reform.