Review makes 51 recommendations for Reserve Bank of Australia

The Reserve Bank of Australia board will be stripped of its power to set interest rates in a huge shake-up of the central bank.

The Reserve Bank governor will hold press conferences after each meeting on interest rates to explain decisions to homeowners under a major shake-up of the central bank.

In a landmark report that details the lessons learned during the Covid-19 pandemic, the key failings of the bank have been outlined by a panel of experts.

Under the reforms, the current RBA board will be stripped of its power to set interest rates. It will be replaced with a panel of monetary policy experts that will meet eight times a year instead of 11 and conduct “more in-depth discussions including of the forecast, strategy and other monetary policy issues.”

Treasurer Jim Chalmers released the review of the RBA today and said it would commit in-principle to 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,” he said.

“The Review found that the RBA is a well-regarded institution, with high quality staff, that has served Australia well. It found that Australia’s monetary policy framework has contributed to good economic outcomes over the past three decades but identified a number of opportunities to strengthen it.”

RBA Governor Philip Lowe. Picture: NCA NewsWire / Gary Ramage

But the report also offers some sharp and detailed criticism of the RBA in recent years and how to improve its performance.

The review had three panellists – Australian National University professor Renée Fry‑McKibbin; Carolyn Wilkins, an external member of the Bank of England’s financial policy committee and former deputy governor of the Bank of Canada; and Gordon de Brouwer, a secretary for public sector reform – and is the first external review of our central bank and the operation of monetary policy in four decades.

The report notes the difficult environment the bank has worked in during recent years but urges it to hold more in-depth discussions and seek more input from outsiders.

“The Governor should hold a press conference after each decision meeting to explain the Monetary Policy Board’s view of policy and economic developments,” the report states.

“External Monetary Policy Board members should be expected to discuss the decisions and thinking of the Board publicly, including through at least one speech or public engagement a year.

“The RBA should publish more of the information underlying the Monetary Policy Board’s decisions, including detailed forecast data and assumptions and insights from business and community liaison. Board papers should be published after five years.”

‘Not about taking shots at anyone’

Speaking today in Canberra, the Treasurer also revealed former AustralianSuper chair Elana Rubin and former Fair Work Commission president Ian Ross have been appointed to fill the vacancies on the RBA board.

“This is about learning from the past, to strengthen the Reserve Bank in the future,” the Treasurer said.

“I will not second-guess or take shots at the Reserve Bank board or the governor. I cherish the independence of the Reserve Bank.

Treasurer Jim Chalmers said the review was not about ‘taking shots at anyone’. Picture: NCA NewsWire / Martin Ollman

Dr Chalmers, who needs bipartisan support to secure the legislative changes, also praised his counterpart Liberal treasury spokesperson Angus Taylor for working constructively on the changes.

He said the RBA governor Phil Lowe, who is not expected to be appointed to another term, had a tough job.

“It is no secret that Philip Lowe has had a difficult job to do and Reserve Bank board has had to make a series of difficult decisions and what I have tried to do as Treasurer and before that as well is not to pre-empt or second-guess decisions made by the Reserve Bank board,” he said.

“This report is not about taking shots at anyone.”

‘An RBA fit for the future’

The report titled “An RBA fit for the future” makes 51 specific recommendations with the government to announce it will accept the recommendations and offer a commitment to the independence of the Reserve Bank and support for the inflation-targeting framework.

As an interim measure, the Treasurer is expected to announce the appointment of two new external RBA board members.

The report also goes into detail over decisions made by the RBA before and after the pandemic including whether the economic stimulus was too generous.

“There were valid economic arguments for and against providing additional monetary policy support in late 2020 that many central banks around the world were weighing,” it states.

“The RBA was forecasting a long and slow recovery, there was significant uncertainty about the economic outlook, and ongoing concern about further outbreaks of the virus.

There were 51 recommendations outlined in the review. Picture NCA NewsWire / Gaye Gerard

“At the same time, early indications were that activity and employment outcomes would not be as bad as expected earlier in the year. Some individuals consulted by the Review noted the significant stimulus already provided and suggested that additional stimulus was unnecessary at this point (Orphanides 2023).

“Regardless of the merits of the case for providing additional support, the Review’s assessment is that the Reserve Bank Board did not receive or request sufficient material to support a robust debate about whether further monetary support was required.”

Christopher Joye, a portfolio manager with Coolabah Capital who previously worked at Goldman Sachs and the RBA, said change was long overdue.

“So what’s happened is because of their heinous forecasting track record, and because of terrible policy mistakes, they have been left with no choice. To be clear, it wasn’t voluntary,’’ Chris Joye said.

“One classic example is Phil Lowe told the world that he wasn’t going to raise rates until 2024. He says that wasn’t a promise.

“He told everyone to go borrow and spend like drunken sailors because he had their backs. And that’s obviously not what transpired.”

Mr Joye said that the RBA had missed its inflation target before the pandemic, overshot its inflation pandemic massively after the pandemic and forecast conditions during the pandemic that would be much, much worse than they actually were.

“And therefore it overstimulated the economy,’’ Mr Joye said.

“But there’s been a broader structural problem which has been for decades. Everyone has known that they’ve been incredibly insular, incredibly arrogant, resistant to any form of criticism.

“The issue with the RBA is that it’s one of the most insular and hierarchical organisations that exists anywhere in the world. They have been incredibly hubristic and an arrogant organisation that for decades would never admit that they’re wrong, or that they had forecast incorrectly.

“Basically, it’s like an internal cult where people are promoted based on tenure. And it’s extremely resistant to both internal debate and dissent and external criticism.”