RBA reform will rightly put interest rates into expert hands
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Many central banks around the world separated governance from interest rates policy long ago, but the Reserve Bank of Australia has remained stuck in the past, an institution held to a system no longer fit for purpose.
Now, following an independent review, Treasurer Jim Chalmers has announced a historic overhaul of the RBA including the abolition of the board and the establishment of two separate bodies – one that sets interest rates and another that oversees the bank’s governance and day-to-day operations.
A panel made up of monetary policy experts will set interest rates, meeting eight times a year. The review also recommended the bank governor hold a press conference after every meeting and members of the new monetary policy panel speak publicly at least once a year.
Given the opprobrium the RBA attracted after imposing 10 consecutive interest rate hikes, putting experts in charge of interest rate policy is a much-needed reform. Theoretically, the RBA board was to be drawn from a wide community base, but increasingly it has been stacked with members from the big end of town, some of whom have had little expertise in monetary policy.
The recommended change will bring the RBA into line with international peers, such as the Bank of England and the US Federal Reserve, while ending a system first proposed during the Great Depression.
The RBA had been severely criticised for years. However, the review, the first outside examination of the bank since the early 1980s, followed an Age investigation that showed concerns about how the bank was operating monetary policy before the COVID-19 pandemic.
The investigation showed the bank had set official interest rates with an eye to meeting its charter of holding the rate of inflation between 2 per cent and 3 per cent but had failed to meet its own target each year since 2014.
Chalmers announced in-principle agreement with all 51 recommendations made by the review panel, but their full implementation remains to be seen.
This is particularly so given the habit of governments to cherry-pick what they want and let the other reforms wither with time. The review’s first recommendation springs to mind: “The government should remove the power of the Treasurer to overrule RBA’s decisions.”
Chalmers also moved to break the Coalition era’s chain of board appointments, announcing two new board members, former Fair Work Commission president Iain Ross and company director Elana Rubin, will replace long-standing board members Wendy Craik and Mark Barnaba, whose terms shortly end.
Treasurer Jim Chalmers in Brisbane on Thursday.Credit: Pete Walllis
They will join the existing nine-member RBA board structure, expected to remain until the new dual board system is legislated and set up, probably this year or next. The Coalition has promised bipartisan support for the reforms.
As the public face of the RBA, the scathing review is a humiliation of governor Philip Lowe, who oversaw record-low interest rates designed to stimulate the faltering economy in the pandemic before appearing to say that central banks, along with governments, had ended up contributing to soaring inflation.
Anger with the bank intensified when Lowe signalled the RBA would hold the official interest rate at 0.1 per cent until 2024 and then lifted it 10 times. Despite having been thrown under the bus of public opinion, Lowe has said he would accept another term as governor. His seven-year term expires in September.
Reform of the RBA is long overdue. Hopefully, the changes enunciated in the review will provide a better outcome for the national economy and ease the pain of inflation now imposed by interest rates on Australians struggling with the costs of living.
Patrick Elligett sends an exclusive newsletter to subscribers each week. Sign up to receive his Note from the Editor.
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