One of the pillars of the Australian financial system, the independence of the Reserve Bank of Australia to set interest rates, is crumbling. It will soon be apparent to all that if anyone outside the big banks has the power to set interest rates in Australia, it is Treasurer Wayne Swan.

Successive Australian treasurers, including Swan, have endorsed the independence of the Reserve Bank and this new power is not one that the current treasurer desired. And I am not sure that either he or Treasury have fully grasped that the game has changed.

With the benefit of hindsight we should have realised that the ability of the Reserve Bank to be the main determiner of interest rates was weakened when Australian banks in the past two decades — but particularly in the past 10 years — turned their back on using local Australian savers but rather funded their growth by massive overseas borrowing on the wholesale banking market.

At the time, they could obtain funds overseas much more cheaply than local savings and this was a contributor to the large growth in bank profits and the Australian economy. But if we had thought about it, we would have realised that we had greatly lessened our power over Australia’s interest rate destiny.