RBA Due for a Shakeup After Long Overdue Government Review

It’s been 40 long years since the Australian Government took a good look under the hood of its own Reserve Bank. The proposed review, dubbed “An RBA fit for the future,” which was originally announced to the public in June last year, took place over several months and was completed for release on the 20th of April.

After all these years, it finally took a global pandemic and the extraordinary events that followed to spur the groundbreaking report, but the three panelists suggested that the review was not only focused on the last six or more months but was also an examination of the bank management practices over the course of more than 30 years.

Bank Governor Philip Lowe was not singled out in the review, according to Australian Treasurer Jim Chalmers. Instead, he acknowledged that Lowe’s position at the RBA has been challenging and that the board has had to make some tough decisions. The Treasurer declined to comment on whether Lowe would be re-appointed this September after his current seven-year term came to a close.

The disastrous prediction made by Governor Lowe in early 2021 that interest rates would not rise until at least 2024, will be one not easily forgotten by many Australians and placed Lowe squarely in the spotlight. Although the RBA never explicitly promised that rates would remain unchanged until 2024, the public saw this guidance as a guarantee that they could borrow with confidence, and many believe they are under financial pressure as a result.

The RBA has raised the cash rate by 3.5 percentage points during the course of 10 consecutive meetings leading up to this month, the most significant rise in interest rates since the bank began inflation targeting in the early 1990s, and there may be more to come.

What does the review mean for the RBA if the new changes come into play? We’ll take a look at some of the more important details from the almost 300-page report below.

The Highlights

Renée FryMcKibbin, a professor at the Australian National University (ANU), Carolyn Wilkins, a former deputy governor of the Bank of Canada and an external member of the Bank of England’s financial policy committee, and Gordon de Brouwer, a secretary for public sector reform, comprised the review’s distinguished panel which composed a total of 51 recommendations for the RBA. Many of which will bring the bank into line with the structures in place at other major reserve banks, such as the Bank of England and Bank of Canada.

According to Treasurer Jim Chalmers, the review was instituted to look into a number of areas of the RBA’s operations, including the bank’s accountability, who was elected to sit on the board, and how it came to decide on the monetary policy that affects the official cash rate.

The most important recommendation to come out of the review is that the current board of the central bank should be divided into two separate boards, one that is responsible for monetary policy, and one for corporate governance of the bank. This would imply that the RBA board, in its present configuration, would no longer be responsible for deciding interest rates.

Also, significant in the review was the suggestion that the RBA governor conducts a press conference after each monetary policy meeting. Currently, the RBA only speaks to the public in its written decision, which is released at 4:30 AM GMT and includes some contributions from the governor. When the RBA finally releases the minutes from its most recent meeting a few weeks later, they give more information about the reasons that led to their decisions. However, the review found that this level of contact with the public was completely insufficient.

In addition, the RBA board currently meets on the first Tuesday of every month (apart from January) for 11 meetings a year to decide how to set the cash rate depending on a variety of economic data. The review suggests that the monetary policy board convenes only eight times a year going forwards. Reducing the number of meetings will give the board more time to examine monetary policy and strategy and to review all of the economic data at their disposal before reaching a decision.

What Does the Review Mean for Future Monetary Policy in Australia?

There are some legislative hoops to jump through before the proposed changes can become a reality. Treasurer Chalmers said that the federal government accepted all 51 proposals “in principle,” but he is seeking support from both sides of the political aisle, which means that the opposition will need to be on his side.

Importantly, the report advises that the RBA’s independence from the current government and its underlying purpose to maintain inflation between 2% and 3% would not be affected by the establishment of a new Monetary Policy Board.

Despite the possibility that a separate council of economists and business experts, who should be better equipped to make monetary policy decisions in general, could be given the authority to set the cash rate and influence bank interest rates, it appears unlikely that this would have a significant impact on monetary policy direction, but only time will tell.

If the changes do happen, one that will be significant to note is the fewer annual adjustments made to monetary policy, which gives the economy and the public more time to adjust to the results of the most recent decisions.

Governor Lowe praised the review and suggested that the current board will now investigate how to put some of the ideas into action. The recommendations are expected to be implemented by July of next year.

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