Wed 23 Sep 2026 12.14 AEST
Photo: AAP Image/Shaney Balcombe
When the Reserve Bank of Australia (RBA) recently announced it would leave interest rates unchanged at 4.35%, Treasurer Jim Chalmers told Radio National Breakfast that many Australians “would have breathed a sigh of relief from the decision by the independent Reserve Bank”.
Chalmers was careful to stress the word “independent”. Though he knew that the RBA’s decision would play well for the Commonwealth Government, he wanted to make it clear to listeners that the Albanese Government had played no role in influencing it.
This is because independence is seen as being very important to a central bank’s role. Borrowers and lenders need to have confidence that a central bank’s decisions transcend politics and are not influenced by the government of the day.
The “fierce independence” of RBA Governor Michele Bullock is championed today, but in the past, the central bank’s independence has been challenged not only by government ministers, but RBA members who have willingly conceded it.
This is according to former RBA Governor Bernie Fraser at the inaugural Bernie Fraser Oration last year, when he claimed former Treasurer Peter Costello had tried to delay an interest rate cut in 1996 for political purposes.
Fraser recalled being “surprised” that “soon after the arrival of the new Treasurer, Peter Costello”, board members close to Costello – including the Treasury Secretary and Peter Costello’s pick for next RBA Governor – were arguing against a recommendation from the RBA to reduce interest rates.
It was only later that Fraser “discovered” that new Treasurer Costello had spoken with these board members and “persuaded” them to delay any interest rate cut for Costello’s political advantage.
Some context is important here. Even before the Coalition won the March 1996 election, Fraser and Costello had been at loggerheads. In July 1995, after Fraser criticised Opposition Leader John Howard for describing that year’s economic recovery as “five minutes of economic sunshine”, Costello called Fraser to tell him to stay out of politics.
Fraser, as he wrote in a confidential memo about the “15 to 20 minutes” phone call, told Costello he would:
speak out against what I saw as untruths (from whatever quarter) which belittled and misrepresented policy, and therefore threatened to undermine its effectiveness. I saw this as something inherent in being ‘independent’.
That same month, Costello told The Australian there was “no way” Fraser would be reappointed as RBA Governor if the Coalition won the next election, a threat that he followed through on: 1996 was Fraser’s seventh and final year as Governor, and he was replaced with Ian Macfarlane in September.
The six months between the March election and the end of Fraser’s term in September were turbulent for the RBA Governor and Treasurer, especially given the economic context.
Australia was still finding its way out of a devastating recession, where unemployment hit 10.8% (the worst since the 1930s depression), and GDP fell by 1.7%.
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Things were a touch better by 1996, partially due to the Keating Government’s One Nation and Working Nation economic programs, but unemployment was still over 8%, and the budget now had a $11.1 billion deficit.
Costello attacked the deficit as the “Beazley black hole” (named after Kim Beazley, Keating’s Treasurer) and used it to justify major cuts to government spending, including welfare, health, universities, and the public service.
Costello knew it would not be a popular budget – as Frank Bongiorno has put it, it created “political pain for the government and economic pain for voters”.
According to Fraser, to try to ease some of the political pain, Costello approached deputy RBA Governor (and soon to be new Governor) Ian Macfarlane to ask him to delay an impending interest rate decision.
Fraser wanted to cut the interest rate from 7.5% to 7%. Costello wanted the RBA to wait a few months until after parliament had passed the budget so he could, in Fraser’s words, claim the budget had “reduced interest rates”.
According to Fraser, during his 12 years on the RBA board, decisions had always been made based on debating the bank’s recommendations and a degree of consensus. Decisions never came down to a vote of board members.
The only time Fraser oversaw a vote was on this 1996 interest rate cut, which Treasurer Costello wanted to delay. This was so rare that Fraser and his staff had to go and check on the formalities of voting arrangements when the vote became necessary.
Fraser believed he had the votes for the rate cut at the crucial meeting, despite the efforts of Costello. Or at least he had the votes before the meeting broke for a half-hour morning tea.
During morning tea, Costello’s board members “got at” an academic board member who had been in favour of a rate cut before morning tea, but suddenly changed his mind after the break.
Now the vote was tied. Fortunately, the RBA voting arrangements gave the casting vote to the board chair, and Fraser was able to “carry the day”.
But it could so easily have gone the other way. After September, Macfarlane replaced Fraser as RBA Governor, who would stay in that role for exactly a decade and adopt a more “hawkish stand” and re-focus the RBA’s activities primarily on inflation targeting.
The message of Fraser’s comments last year was that we cannot take the independence of a central bank for granted. Governments can and do try to intervene in central bank decisions when they think it’s politically viable (just look to US President Donald Trump’s regular attacks on the Federal Reserve for a present-day example). That the Commonwealth respects the RBA’s independence today does not mean we should not remain vigilant about governments of tomorrow.
James Watson is a Postdoctoral Research Fellow at The Australia Institute. A graduate of the Australian National University’s School of History, he has written on the intersections of politics, economics, and social movements for The Guardian, History Australia, and Labour History.
