RBA to have 2 boards as part of major shake-up

The review, which was first committed to by the Morrison government and officially announced in July last year, analysed the RBA’s performance over the past 30 years and considered the “appropriateness of the inflation-targeting framework”; the makeup of “board structure, experiences and expertise, composition and the appointments process”; and the conduct of the bank “during crises and when monetary policy space is limited”.

It also considered its choice of policy tools, policy implementation, policy communication, and how trade‑offs between different objectives have been managed.

The review was led by a panel of three “independent experts,” including former senior deputy governor of the Bank of Canada, Carolyn Wilkins; Australian National University economics professor Renée Fry‑McKibbin; and Australian economist Dr Gordon de Brouwer.

Overall, it found that, over the past 30 years, inflation has averaged around the midpoint of the RBA’s target of 2 to 3 per cent and the variability of output and unemployment has been lower than in earlier decades.

It suggested that the RBA had “played a particularly critical role during crises, where it has acted decisively and effectively to support the economy and protect against severe outcomes” but noted that the recent, “more challenging environment” had “highlighted areas where Australia’s monetary policy framework could be improved”.

Key recommendations

As such, among the major changes of the review is a recommendation to move away from having one board that oversees everything to one that sets monetary policy and the cash rate and another that oversees the bank’s governance and management (including HR, technology, and risk management). This would reduce the concentration of power when it comes to central bank decisions and improve governance.

The governor would only chair the monetary policy board, which the review recommends should reduce its number of meetings per year (currently 11 meetings) to potentially only eight times a year. This would allow for “more in-depth discussions,” including of the forecasts, strategy, and other monetary policy issues.

An additional two new board members are expected to be appointed to the board structure (which currently has nine people) to also bring more people into the decision-making of the bank. This is expected to include those who specialise in economics, labour markets, and financial markets to provide “diverse perspectives and knowledge”.

As such, the monetary policy board should comprise the governor, deputy governor, treasury secretary, and six external members.

The reviewers were critical of the current board structure, stating: “Currently, the Reserve Bank Board provides only limited challenge to the RBA executive’s view and its skill set is not matched to the complex and uncertain economic environment in which monetary policy will increasingly operate. The external members of the board have been outstanding leaders in their fields. However, collectively, they have less economic and financial market expertise, and spend less time on monetary policy, than decision-making bodies at comparable central banks. 

“Monetary policy involves making technical judgements and important trade-offs in an uncertain environment. Combining the judgement of a group of people with deep and relevant expertise provides the best chance of achieving good outcomes. The Review seeks to raise the collective economic and financial expertise of monetary policy decision-makers, while recognising the importance of retaining diverse perspectives and knowledge.”

The move to separate out the governance decisions of the central bank comes after RBA governor Philip Lowe received widespread criticism in 2021 by outlining that the central bank would not increase interest rates (from the record-low level of 0.10 per cent) until 2024. The review noted that as early as October and November 2020, the governor had said the cash rate would not be increasing “for at least three years”, with the language updated in February 2021 to reflect that the RBA board did not expect conditions to increase the cash rate to be met “until 2024 at the earliest”.

Mr Lowe had said in the past that the RBA was targeting a sustainable inflation range between 2 to 3 per cent in order to increase rates. He said: “Predicting how long it will take is inherently difficult, so there is room for different views. But our judgement is that we are unlikely to see wage growth consistent with the inflation target before 2024. This is the basis for our assessment that the cash rate is very likely to remain at its current level until at least 2024.”

However, as inflation accelerated, surging to 5.1 per cent for the year to March 2022 amid supply chain issues and the Ukrainian war, the RBA increased the cash rate for the first time since 2010 in May 2022.

The RBA reviewers said: “We have identified four ways the governance, monetary policy framework, culture and systems of the RBA should be reinforced.

1. The monetary policy framework is fundamentally sound but should be more clearly defined and regularly assessed for updates.
2. Monetary policy decision-making should be strengthened, drawing on more expertise and with processes that promote deeper contestability of ideas.
3. The RBA should become more open and dynamic, through new internal structures and approaches.
4. The RBA’s corporate governance should be strengthened, with contemporary governance structures that better manage risk and drive change.

“Structures and policies can only achieve so much. To be fully effective, the RBA’s leadership and board need to drive these changes, through what they say, do, measure and report. Our changes would fortify an already effective institution, making it better placed to face the challenges of the future.”

Other recommendations include:

• Removing the RBA’s power to direct lending policies of private banks (an old responsibility that was transferred to APRA in 1998). “The RBA does not need, nor should have access to, powers that enable it to direct the lending activities of banks,” the reviewers said, noting that APRA is now accountable for supervising banks, maintaining financial safety and stability and has been provided with appropriate powers to do so.
• While the cash rate should remain the primary tool of monetary policy, the RBA should “continue to consider using other monetary policy tools when the cash rate cannot go any lower”. The reviewers suggested that before deploying such tools, there should be “better consideration of their costs and benefits, risk analysis and exit planning”. As such, they said the RBA should develop and publish a framework for the use of these tools to embed lessons from its recent experience.

In a statement following the release of the review, Mr Lowe said: “The Review Panel rightly acknowledged the substantial contribution the bank has made to Australia’s economic success and the skills and dedication of the staff. It also acknowledged that the RBA is highly regarded and respected in Australia and overseas.

“The recommended changes will build on that strong foundation and strengthen the Bank’s governance and decision-making processes. They will help us deal with the complex world in which we operate as we strive to promote the economic welfare of the Australian people.”

Commenting on the review, Treasurer Jim Chalmers said the Albanese government “agrees in principle” with all the review’s recommendations and “will now work with the RBA, the parliament and other stakeholders to implement them”.

“Australia faces a complex and rapidly changing environment, and we need the most effective central bank and monetary policy framework to meet current and future economic challenges,” Mr Chalmers said. 

He flagged that “given the importance of the RBA’s independence”, bipartisan support “will be critical” to implementing some of the recommendations through legislation.

The Treasurer further added that the government intends to introduce legislation to reinforce the independence of the RBA in the operation of monetary policy; strengthen the RBA’s mandate and clarify that Australia’s monetary policy framework will have dual objectives of price stability and full employment; and establish a separate monetary policy board and governance board.