Treasurer Jim Chalmers has the political all-clear for the largest overhaul of the Reserve Bank in a generation by the middle of next year, with a specialist committee given the job of setting interest rates while ensuring all Australians can get a job.
The Coalition on Thursday signalled it would back the 51 recommendations of the independent review of the Reserve Bank that found the institution and its current board make-up struggling with the increasing complexity of monetary policy settings.
Households will have more time to absorb interest rate rises with the bank to drop its traditional monthly meetings in favour of eight a year while the RBA’s core mandate will be narrowed to fighting inflation and delivering full employment.
Chalmers, who in 2021 promised the RBA’s first review in more than 40 years, on Thursday released the 300-page document that found while the bank had performed very well over the past 30 years, there were areas of pressure that required substantial change.
The Treasurer said the review was not aimed at RBA governor Philip Lowe, whose seven-year term is due to end in September, but at improving the overall operation of the bank.
“This is about making sure we’ve got the right combination of objectives and structures and processes and people to make the right decisions, difficult decisions, into the future,” he said.
Lowe said the review would help the bank change, admitting current oversight arrangements at the RBA were short of contemporary standards.
Chalmers will decide by the middle of the year whether to extend Lowe’s term. The governor said he would continue to serve if asked.
“It’s a great honour, and it’s a great privilege to have the job. I would say it’s also great responsibility,” he said.
The review panel was made up of 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 more complex and uncertain environment has tested the RBA and its monetary policy framework. This has underscored some of the strengths of current arrangements. But in a number of recent episodes, it has highlighted clear opportunities to improve systems and processes,” they found.
The biggest change proposed is the creation of a separate monetary policy committee to set interest rates.
It would include the bank governor, their deputy and the Treasury secretary, plus six people who have expertise in macroeconomics, the financial system, labour markets or the supply side of the economy.
This would be a major departure from the current system under which the RBA board is made up of non-monetary policy experts, mostly recruited from the business community.
The review found the current board arrangement was struggling, while saying a new specialist committee should have a strong independent voice on monetary policy.
“The Reserve Bank board’s current processes do not provide members with enough information, time or support to sufficiently explore policy options and strategies or to challenge RBA views,” it found.
“Moreover, on some occasions, the board has not requested or been given information relevant to its decisions, or has not been fully involved in significant policy decisions.”
Chalmers also announced on Thursday that former head of the Fair Work Commission Iain Ross and non-executive director of Dexus and Telstra, Elana Rubin, would be appointed to the board.
It is expected Ross, who was an assistant secretary with the ACTU until 1994, will eventually shift to the monetary policy committee because of his background dealing with labour market issues.
Shadow treasurer Angus Taylor said the review had done a good job of examining the Reserve Bank’s recent performances, signalling support for the proposed changes that the government plans to have in place by mid-2024.
“We welcome the fact that it has dealt head-on with some of the errors of the recent past. There have been great challenges in the forecasting and guidance that has been given by the Reserve Bank.
“Many households and businesses have paid a real price for those errors. It’s important that everything be done as much as possible at least to prevent that happening.”
The review panel examined three key periods – between 2016 and 2019, the bank’s COVID policies and its response to last year’s surge in inflation – and found the RBA wanting in all stages.
It said the bank was initially slow to respond to last year’s inflation outbreak, criticising the RBA’s focus on wages growth as a driver of price increases.
“Deeper consideration of monetary policy strategy, risks and opposing views, and use of a richer suite of models and data, may have reduced the risk of misjudging inflation,” it found.
The bank’s current charter requires it to focus on the stability of the currency, full employment and the “economic prosperity and welfare” of all Australians. The review recommends stability of the currency be changed to stability of prices and full employment.
Price stability will mean keeping inflation between 2 and 3 per cent, which is the RBA’s current inflation target. Inflation is currently at 6.8 per cent.
The head of Deloitte Access Economics, Pradeep Philip, said while the review recommendations would improve the bank’s operation, they would not immediately affect ordinary Australian households and businesses.
“These sorts of changes will be of little relevance to Australian households and business struggling with rising mortgage interest rates and broader economic pressures – that will depend on the people who make those decisions, the quality of their analysis, and the culture of the institution in which they make these decisions,” he said.
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