RBA review: Chalmers’ overhaul creates new risks of miscommunication

Treasurer Jim Chalmers’ reforms mean Australians will know all they want to know about the people who are setting the interest rates on mortgages and business loans. Picture: Dan Peled / NCA Newswire.

In announcing the Reserve Bank of Australia’s most extensive reforms in 30 years on Thursday, Treasurer Jim Chalmers has also tampered with policymaking processes that helped the central bank achieve the longest continuous boom of any developed economy on record. The changes could mean more accountability for the RBA but there are risks to how well it communicates.

The Australian economy’s stunning 28-year expansion — ended by the Covid-19 pandemic — was achieved under the current RBA board structure, which successfully delivered relatively low inflation over many, often tumultuous, economic cycles.

But from an international perspective, the RBA’s current structure looks quirky and even badly lacking in accountability.

The board comprises nine individuals that include the RBA governor, the RBA deputy governor, the Secretary of the Treasury, and a group of six others drawn from areas like business and academia.

The latter six usually consists of skilled business people with high-end management experience and first-hand knowledge of key sectors of the economy like mining and retail trade. More often than not, they are not trained economists and are unknown to the public despite their power to adjust millions of Australians’ mortgage repayments each month.

And although they make up two-thirds of the board, this group is never asked to speak publicly about the economy as members of the US Federal Open Market Committee often do. The only exception to this is that the group can include one senior academic economist, who can be interviewed by the media. But their comments are always offered with the proviso that it be made clear that they aren’t speaking on the RBA’s behalf.

The current structure results in most board members being unaccountable and unapproachable, although this shouldn’t detract from the fact that the RBA has delivered strong results for Australia.

Mr Chalmers’s revamp of the RBA will create a dual board system, with one focused exclusively on interest rate decisions and stacked with people of higher economic expertise, while the other will deal with more mundane issues of internal governance.

The new interest-rate setting board will work a lot like the policy committees at the Bank of England and the Bank of Canada.

So for the first time, Australians will know all they want to know about the people who are setting the interest rates on mortgages and business loans.

That could create problems if handled poorly.

The new board is likely to bring a lot of fresh public chatter on the conduct of monetary policy into the public square. That could add to confusion about the central bank’s guidance.

Currently, policy signalling comes almost exclusively from the RBA governor and the deputy governor, who usually work cooperatively.

“You can communicate too little, but you can also communicate too much … in some other countries you’ve got a lot of people talking about monetary policy and that adds to noise, so we have to work out a way to have more people speak, and to do it in a consistent way,” RBA governor Philip Lowe said after the release of the review.

Poor policy signalling over recent years has badly dented the RBA’s credibility, with most of the angst directed squarely at Dr Lowe.

The problems emerged as the RBA clumsily exited from the extraordinary policy measures enacted to deal with the pandemic. Those moves prompted widespread confusion in markets and angered homeowners who were counting on many more years of record-low interest rates.

Demands from politicians and some economists for Dr Lowe to resign became commonplace.

It would therefore be ironic if the root and branch review of the RBA announced by Mr Chalmers only resulted in more confusion in the central bank’s communications.

Dow Jones newswires