By Shane Wright
The public revelation of splits within the Reserve Bank board over interest rates and more insights into how the bank believes the economy is performing shape as key features of the biggest overhaul of the nation’s most important economic institution due to begin this week.
From today, official interest rates – which determine the price of mortgages and business loans – will be set by a monetary policy committee rather than the Reserve Bank board.
Governor Michele Bullock will take the Reserve Bank into its biggest change since it started in 1960.Credit: Bloomberg
The committee was the key recommendation out of the independent review of the Reserve Bank which has also included press conferences held by governor Michele Bullock to explain rate decisions and the shift to eight two-day meetings a year rather than every month.
The committee is made up of Bullock, bank deputy governor Andrew Hauser, Treasury secretary Steven Kennedy, existing board members Carolyn Hewson, Ian Harper, Iain Ross and Alison Watkins, plus two new members, Marnie Baker and Renee Fry-McKibbin.
Baker has been chief executive officer of the Bendigo and Adelaide Bank and deputy chair of the Australian Banking Association. Fry-McKibbin is a highly respected Australian National University economist who served on the Reserve Bank review panel.
The new committee will have its first formal meeting on March 30 and April 1.
Financial markets put the chance of the monetary policy committee cutting rates at that meeting at one in four. But the same markets believe there’s an 80 per cent chance of a rate cut at the committee’s mid-May meeting.
By year’s end, markets expect the RBA to have the cash rate at 3.6 per cent. If that is passed on in full by commercial banks, a person with a $600,000 mortgage would enjoy a $200 a month reduction in repayments.
That meeting, apart from deciding on interest rate settings, is also expected to discuss how it tells the public and financial markets about its decisions.
The independent review recommended that the post-meeting statement announcing the cash rate contain an unattributed vote tally. This would reveal if there were members of the committee at odds with the majority position. Presently, decisions are made on a consensus basis.
Hauser, who moved from the Bank of England to take up his position early last year, told a Senate committee last week that the Reserve wanted to be more open about its decision-making processes.
“There is a desire to continue the journey of explaining in more depth the rival economic arguments that underpin a decision, and a desire to increase transparency and accountability … but also a desire not to increase the noise over the signal,” he said.
The Bank of England makes public the individual votes of members of its monetary policy committee. Other central banks release the votes but do not identify which member voted for a particular decision.
Hauser said he thought it was unlikely the Reserve Bank would follow the Bank of England example.
“I think it’s unlikely that a model that extreme is the one that the Reserve Bank board prefers,” he said.
RBA deputy governor Andrew Hauser doesn’t expect the new monetary policy committee to reveal how members vote.Credit: Alex Ellinghausen
But a total vote, showing how many of the nine-member monetary policy committee supported a particular position, is likely to be made public.
Before the committee’s first meeting, it is likely to hold a “policy issues meeting” in mid-March to cover some of the extra analytical material that will ultimately be canvassed when a decision on interest-rate settings is finally made.
The committee also has to decide on another recommendation out of the independent review – holding public engagements, including speeches, by all members on the committee.
Presently, set speeches are restricted to Reserve Bank staff. But the review found the load should be shared among the full committee membership. This would sharply lift the profile of people charged with setting interest rates.
It would be in stark contrast to when the bank emerged out of the Commonwealth Bank in 1960. Five of the board’s members were knights of the British Empire, all were men and none spoke publicly about its decisions.
The committee also has to decide on how to interact with a separate organisation, the Council of Financial Regulators, which is made up of the Reserve, the federal Treasury, the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority (APRA).
The independent review recommended the council be informed where interest rate settings are “likely to affect, or be affected by, risks to financial stability”.
An updated council charter, plus a memorandum of understanding between APRA and the Reserve Bank, are expected this year that would formalise its structure which is largely unknown outside financial circles.
Another issue the committee will soon canvass is creation of an “expert advisory group” on monetary policy that would increase the number of voices offering opinions on the state of the economy.
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