SYDNEY — Australian Treasurer Jim Chalmers on Thursday announced the biggest reforms of the Reserve Bank of Australia in three decades, moving to bolster the level of expertise involved in the setting of interest rates, while striking hard at what many critics say is the closed culture of the central bank.
The changes will see the RBA adopt a monetary-policy committee structure that mimics in many ways processes now in place at the Bank of Canada and the Bank of England, while the number of policy meetings each year will be reduced to eight from the current 11.
The RBA’s dual-board system will see the first focus on policy decisions and effective forward guidance, while the second board will deal with more mundane internal-governance issues.
“The Reserve Bank Board’s composition and decision making processes have not sufficiently enabled it to shape policy decisions, strategy, and the RBA’s underlying analysis and judgements,” the review said.
“The government should form a Monetary Policy Board with greater economic expertise and participation in decision making while maintaining diverse perspectives and knowledge,” it added.
Crucially, the review recommends no changes to the RBA’s 2% to 3% inflation target that has underpinned all policy decisions since the mid-1990s, while enshrining its independence.
“Flexible inflation targeting operated by an independent RBA has generally worked well over three decades, contributing to lower, more stable inflation and unemployment,” the review said.
The RBA should also have dual monetary-policy objectives of price stability and full employment, with equal consideration given to each, the review said.
“Monetary policy decision making should be strengthened to deal with an increasingly complex environment that includes more supply-side shocks and a broader monetary policy toolkit,” it said.
In a move to bolster the RBA’s transparency, the review calls for press conferences after each meeting, papers published after five years, and that board members occasionally speak publicly about the policy outlook, while also appointing a new chief communications officer to help with guidance and overall messaging.
The review of the RBA is the most comprehensive reshaping of the central bank in decades and follows a period of turmoil and criticism of key figures within the bank as interest rates were raised at a record pace since May last year.
The “splitting of the board makes a lot of sense and in line with international best practice,” said Su-Lin Ong, chief economist at RBC Capital Markets.
A board of policy experts, effectively an MPC like in Canada or the U.K., will ensure more robust debate and policy deliberation for a better outcome,” Ong added.
“It’s not the silver bullet and you can argue that other central banks with this structure have made mistakes but it surely reduces the risk,” she added.
The rapid pace of interest-rate increases in Australia since last year has led to calls from some politicians and economists for RBA Gov. Philip Lowe to resign, demands that he has so far ignored. His current term ends in mid-September, with some economists speculating that his replacement might come from overseas.
The review makes 51 specific recommendations for change under 14 broader headings.
Some of the proposed changes will fall to the RBA to implement given that it operates monetary policy independently, while others will require legislative change.
Paul Bloxham, chief economist at HSBC Australia said the current board structure at the RBA has been very successful, but the changes will modernize its processes.
“Keep in mind that over the longer term, the current RBA policy framework has been very successful. One of the key reasons that Australia had the longest boom of any developed economy on record–28 years and only ending with the arrival of the pandemic–was successful monetary policy,” Bloxham said.