Sweeping Reserve Bank of Australia reforms are expected to result in greater recognition of the impact of interest rates on jobs and wages as the federal government flags plans to enshrine a dual central bank mandate to fight inflation and aim for full employment in legislation.
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As the pressure of 10 successive rate rises bears down on households and businesses, the government has backed major changes to the way the Reserve Bank operates, including abolishing the current nine-member RBA board and splitting its functions between a dedicated Monetary Policy Board, tasked with setting interest rates, and a separate Governance Board to oversee organisational strategy, finances, strategic staff planning and risk management.
As part of reforms, the government-commissioned review panel has recommended that the interest rate-setting board include six external members with expertise in macroeconomics, the financial system, labour markets and the "supply side of the economy".
Endorsing the call, Treasurer Jim Chalmers that, "I certainly intend to make sure the interests of workers are front and centre...in those [monetary policy] considerations. I think that workers deserve a voice around the Reserve Bank table".
The Reserve Bank already has as its objectives to pursue price stability and full employment, but the RBA review has recommended these be given equal consideration and legislated - a suggestion endorsed by the treasurer.
Dr Chalmers said he wants "to make sure that the wages and living standards of ordinary working Australian are considered and contemplated as the Reserve Bank takes its decisions".
The change is part of the most significant overhaul of the Reserve Bank undertaken in the past four decades.
The 294-page review, released by Dr Chalmers on Thursday, found that although the Reserve Bank has made a significant contribution to Australia's strong economic performance in the past 30 years, recent challenges, including the COVID-19 pandemic and the current surge in inflation, have highlighted shortcomings, particularly a lack of specialist expertise, communication problems and deficient decision-making arrangements.
The review recommends greater clarity around the monetary policy framework, increased transparency and accountability in the setting of monetary policy, making the RBA more open to other ideas and strengthening its governance.
Among key changes is a proposal that the central bank's new monetary policy board meet eight times a year to ensure it and RBA stuff have sufficient time to make better informed rate-setting decisions. The review also recommends a media conference be held following each board meeting.
Treasurer Jim Chalmers welcomed the review's findings and said the government agreed "in principle" with all 51 of its recommendations.
"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," Dr Chalmers said.
"This review, its recommendations and our response are all about ensuring the Reserve Bank has the best frameworks, objectives, processes and expertise."
The treasurer said the government intends, subject to consultation with the Opposition, to legislate several of the review's recommendations, particularly to strengthen the RBA's independence, clarify the objectives of monetary policy and to establish the Monetary Policy and Governance boards. He said the goal was to have the review's recommendations "in place and ready to go" by mid-2024.
Dr Chalmers said he would also hold discussions with the RBA on a new Statement on the Conduct of Monetary Policy to be finalised by the end of the year.
"The statement will reaffirm the government's commitment to the independence of the Reserve Bank and support for the inflation targeting framework," he said. "It will also set out our shared understanding for strengthening decision making, accountability and transparency in monetary policy decisions, in line with the review's recommendations."
RBA Governor Philip Lowe said the central bank would "work constructively" with the government and the treasurer on the implementation of the changes recommended by the review, including the establishment of separate monetary policy and governance boards.
"The recommended changes will build on that strong foundation and strengthen the Bank's governance and decision-making processes," Governor Philip Lowe said. "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."
Many of the recommendations to improve communications communications and improved support for the board will have to be implemented by the Reserve Bank. Dr Lowe said the central bank would develop a plan to put the changes into effect, including discussions by the RBA Board about changes to the frequency of board meetings.
Opposition treasury spokesman Angus Taylor welcomed the "very positive" direction of the RBA Review.
Mr Taylor said the Coalition was "very open" to the proposal to split the functions of the RBA board and create a dedicated Monetary Policy Board to set interest rates and a separate Governance Board to oversee operations and be responsible for communications and transparency.
"At face value, the direction of this is positive," the shadow treasurer said.
"The key here is to make sure we have a group of people around the table making interest rate decisions who are very focused, who have deep expertise, where there is real intellectual diversity".
The shadow treasurer said the Coalition would consider the details of the review's recommendations, but his initial response was promising for Treasurer Jim Chalmers, who has made clear he is keen to secure bipartisan support for the RBA reforms.
Greens leader Adam Bandt dismissed the RBA review as a "major party stitch-up" and called for the departure of governor Philip Lowe.
In releasing the review, Dr Chalmers also announced the appointment of former Fair Work Commission president Iain Ross and financial services expert Elana Rubin to fill two forthcoming vacancies on the RBA Board.
The treasurer said Dr Ross's appointment reflected his belief that the RBA needed to have input from a person who "understands and is expert in the labour market".
The review has called for greater clarity around the objectives of monetary policy, recommending that the central bank have a dual mandate to pursue both price stability and full employment, "with equal consideration given to each".
"The economic prosperity and welfare of Australians, now and in the future, should be legislated to be the overarching purpose for the RBA in the exercise of all its powers. Monetary policy can best contribute to this overarching purpose by focusing on full employment and price stability," it said.
The review found that the current challenging environment has "highlighted areas where Australia's monetary policy framework could be improved".
In particular, it said that "some aspects of the framework and the RBA's regular communication have not always been clear or detailed enough".
"The decisions to implement additional monetary policy tools during COVID-19 would have benefitted from a Reserve Bank Board with more specialist expertise, support and time to fully test the proposed policies."
"At the same time, stronger decision-making arrangements may have helped mitigate eventual shortcomings in the RBA's forward guidance, yield target, term funding facility, and bond purchase program."
The review found that the central bank was slow to respond to the rise in inflation last year - a failure it shared in common with many other central banks.
"An overemphasis on wages as a driver of persistent inflation, reliance on forecasting and modelling tools that offered limited insights on the supply side of the economy, and the way forward guidance and the yield target had been designed and used all contributed," it said.
"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."
The review said there was a need to strengthen monetary policy decision making by drawing on more expertise and promoting greater contestability of ideas.
It also called for greater transparency.
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The review criticised what it saw as limited information provided to the public about the factors driving the RBA's decisions, arguing that "current arrangements do not adequately support transparency and accountability of the Reserve Bank Board and its members".
It said there should be "press conferences after each meeting, papers published after five years, and board members occasionally speaking publicly about the work of the board" and recommended the creation of a Chief Communications Officer position.
In addition, the review raised concern about the degree to which the views of RBA staff prevailed at board meetings, noting that between 2016 and 2019, "the Reserve Bank Board never took a decision that went against the recommendation of the RBA executive. This is despite inflation consistently undershooting the Reserve Bank Board's target".
The review recommended that changes should be legislated to commence from July 1 next year.
