The Reserve Bank is facing its biggest shake-up since the early 1990s, with the institution’s first review in four decades poised to recommend changes to the way it operates and communicates with the public.
Interest rates set by a committee of economic specialists rather than the current board, fewer meetings to discuss rate settings and regular press conferences by the bank governor to explain monetary policy settings are all expected to be canvassed in the final report from an independent panel of experts that has spent the past six months reviewing the RBA.
But an overhaul of its use of interest rates to target the rate of inflation is unlikely amid concerns any radical change would become embroiled in a political fight that could undermine the bank’s independence from the government of the day.
The review, the first outside examination of the bank since the early 1980s, will be delivered to Treasurer Jim Chalmers on Friday. It was prompted by a and investigation that showed concerns about how the bank was operating monetary policy before the COVID-19 pandemic.
Anger over the bank has intensified since then after the RBA – which had signalled it would hold official interest rates at 0.1 per cent until 2024 – started tightening monetary policy in May last year.
The review is being led by a three-member panel that includes international monetary policy expert Carolyn Wilkins, who sits on the Bank of England’s financial policy committee; the interim director of the Crawford School at the Australian National University, Renee Fry-McKibbin; and the secretary for public sector reform Gordon de Brouwer.
The review received more than 110 submissions, carried out three surveys involving 1100 people and conducted more than 230 interviews, including with the RBA board and its senior executives.
A key issue has been the structure of the bank. Unlike most central banks, monetary policy is set by the RBA’s board of non-monetary policy experts, an idea first proposed by Great Depression-era Labor treasurer Ted Theodore.
Most central banks have moved to separate monetary policy committees while the operation of the bank itself is left to the governor or a board of directors similar to a private company.
Any move to a separate monetary policy specialist committee would likely require changing the RBA’s operating legislation. Changing the RBA Act would put pressure on both the government and Coalition to take a bipartisan approach to reforming the bank.
Chalmers, who has kept in contact with the review panel, has already made one change to the board appointment process by moving to a public expression-of-interest system.
The clearest signal the review panel would propose a new monetary policy committee was late last year at a Committee for Economic Development of Australia event where Fry-McKibbin said a range of proposals would be delivered to Chalmers.
She said different recommendations, depending on the willingness of the government and opposition to change the RBA’s operating Act, might have to be considered.
“We’re considering coming up with a set of recommendations that we would make if we did open the Act, and a set of recommendations that we might [make] if politicians didn’t want to do that,” she said.
The review is not expected to recommend a change to the RBA’s 2-3 per cent inflation target, which has guided the institution’s interest rate settings since the early 1990s.
However, the target itself is not part of the RBA’s overriding legislation. It is part of the “statement on the conduct of monetary policy” agreed between the bank governor and the federal treasurer of the day.
The last statement was signed between Lowe and then-treasurer Scott Morrison in 2016. It has not been changed since.
Chalmers has been waiting on the RBA review before deciding on the next monetary policy agreement with the bank, which could be with a new governor.
Philip Lowe’s current seven-year term is due to finish in September. RBA experts have said it is unlikely Lowe will be offered an extension to his term if the panel recommends substantial change.
Lowe, who is due to deliver a major speech next week, has come under strident political attacks for his handling of monetary policy over the past year, including calls for him to be sacked.
The review is expected to recommend changes to the bank’s meeting schedule. The RBA meets every month bar January, while most other central banks discuss monetary policy settings every six to eight weeks.
The RBA is also different from other central banks by not holding press conferences to explain its decisions. US Federal Reserve chairman Jerome Powell, for example, holds regular press conferences while also facing Senate and House committees.
The bank relies more heavily on public speeches to articulate its thoughts on the economy.
Economist and former Treasury official Steven Hamilton said the government had to make real changes to the bank’s operation.
He said he was worried the review would offer sets of recommendations as this could give the government a way out of making fundamental reforms including the bank’s board structure.
“The greatest risk is that the government makes a whole lot of cosmetic changes to generate the appearance of fixing the RBA’s problems but without actually addressing them in substance,” he said.
“This would implicitly endorse – and cement – RBA dysfunction. It remains to be seen whether the treasurer has the mettle to do what is required of him. He won’t get a second chance.”
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