Economists welcome RBA reforms but policy board selection is key

Legislation to restructure the Reserve Bank board in line with recommendations from the recent review of the central bank could improve transparency and decision making on interest rates, economists say.

Treasurer Jim Chalmers holds a meeting with the State Treasurer at Parliament House in Canberra. Picture: NewsWire / Martin Ollman

Some of the nation’s top economists have welcomed the passage of legislation to restructure the Reserve Bank board in line with recommendations from the recent review of the central bank saying that it could improve transparency and decision making on interest rates.

The long-delayed legislation will create two separate boards, one for monetary policy decisions and another for governance, after the government struck a deal with the Greens and the Senate crossbench on a major overhaul of the central bank.

The composition of the nine-member monetary policy board – which will still include the RBA governor, deputy governor and treasury secretary plus six external members to be appointed by the Federal Treasurer - is seen as a key uncertainty.

But, generally speaking, economists said the new legislation was a big step in the right direction.

“Our base case remains for the RBA to start cutting rates in February, but the changes raise the uncertainty around the RBA’s reaction function going forward, given potential new personnel,” said Goldman Sachs Australia chief economist Andrew Boak.

“In practical terms, it means current external Board members may be moved to the new Governance Board, opening room for new external appointees to the new Monetary Policy Board.”

The review recommended external members of the new board have expertise in areas such as “open-economy macroeconomics, the financial system, labour markets, or the supply side of the economy” and be required to give public speeches and formally vote at board meetings. While the new Monetary Policy Board will also oversee financial stability policy, the broader corporate governance of the RBA will be overseen by a separate board that will comprise the governor, deputy-governor and separate external members.

Federal Treasurer Jim Chalmers said he expected the reforms to take effect three months after being approved by the governor-general.

“Our expectation, what we’re anticipating, is that the new board would be constituted after the February meeting,” he said.

The RBA governor has indicated her preference for at least some current RBA board members to be split between the new policy and governance boards, but the decision rests with the treasurer.

“We don’t yet know who’s going to be on the monetary policy committee, and that’s going to be critical,” said HSBC Australia chief economist, Paul Bloxham, a former RBA economist.

“If they shift everyone over from the existing board, I guess in principle, that wouldn’t make any difference…it will depend on the appointments - who they are.”

ANU economics professor Warwick McKibbin said the passage of the legislation to form separate policy and governance boards at the RBA was a “good outcome.”

“The review recommended it for good reason,” he said. “It is a great concept.”

“Having been a board member myself, I know the problems of not having enough coverage of both the economic policy decision making and the governance of the institution itself.”

Mr McKibbin served on the RBA board from 2001 to 2011.

“As it says in the review, you want people setting monetary policy who have expertise in monetary policy issues, not just academics, but people who actually have a background somewhere in economic policy formulation and monetary policy.

“But you need a separate board to deal with the complexities of artificial intelligence, digital currencies, and a whole range of stress issues to do with security.”

But Mr McKibbin was “very disappointed” that the Coalition didn’t support the legislation.

“One of the problems is - who do you appoint to the board?” he said.

“If the Opposition had come on board, the Government presumably could have done a deal to appoint RBA board members from across the political spectrum.

“But they handed whatever negotiations were done to the Greens.”

Treasurer Jim Chalmers will be able to appoint up to six several figures to the powerful new policy setting board before the Federal election that must be held by May 17.

While the Coalition had initially offered its support for the review’s findings, it later grew wary that Labor could “sack and stack” the proposed specialist rate-setting board, a fear fuelled by Labor’s appointment of two ex-union officials to the current board.

In an attempt to ease Coalition concerns, Dr Chalmers agreed to automatically transfer all six external members of the current board to the new monetary policy committee unless they expressed a desire to instead sit on a separate governance board.

However, after Mr Chalmers accused the RBA of “smashing the economy” via its aggressive run of rate hikes, opposition Treasury spokesman Angus Taylor relinquished the Coalition’s support.

“This is a long term investment in institution-building in Australia,” Mr McKibbin said. “We might end up with the wrong people appointed…their skills are the key…their political backgrounds could be biased, but that’ll eventually wash through the system, like it has historically in the US.”

He also said the legislation should help make the RBA’s decision making process more transparent as board members should be allowed to publicly comment on monetary policy, but that attributing policy votes to particular board members should wait until the board is “purely professional.”

“The big problem is that board members, in my experience, always vote in the interests of the country, but they’re appointed to the board because of the interest to a particular sector,” he said.

“And of course, if you’ve got a sectoral interest that’s conflicted with the national interest, it puts board members in a very difficult position to be public about what they voted for.

“As soon as it’s public, then the sectoral interest is going to be making a noise.”

Independent economist and Vice-Chancellor’s Fellow at the University of Tasmania, Saul Eslake said Australia has until now been “a bit of an outlier” in that to be on the RBA board “knowing something about monetary policy was almost a disqualification”.

“The only people who had serious knowledge of monetary policy making were the three officials, and sometimes the academic economists such as Warwick McKibbin, John Edwards and Ian Harper.”

“Then you have people with business acumen – and I’ve been told by previous governors that they do leave their personal interests at the door – and that’s one reason why they don’t disclose votes, because sometimes business members of the board have voted in favour of things that they’ve been persuaded were good for the country, but not might not have been good for their companies.”

Even central banks dominated by monetary policy experts haven’t always got it right - the RBA wasn’t the only central bank to leave interest rates too low for too long, but it was the second-last central bank to start lifting interest rates after the pandemic, and its former governor Philip Lowe made a “mistake” in putting a date on how long interest rates would at record lows, Mr Eslake said.

“Similarly, the Reserve Bank made mistakes in the five years or so before Covid, keeping monetary policy too high, as evidenced by the fact that unemployment remained above 5 per cent and we undershot the inflation target for seven years,” he added.

“The RBA board gave insufficient weight to the fact that fiscal policy was being tightened progressively through that period, and I think if they had a body like the one that’s now proposed, the likelihood of those mistakes would have been less.”

“No one’s perfect…but I think this would provide for a better opportunity for the thinking and recommendations of the senior RBA officials and the staff to be challenged and tested.”

Ms Eslake also criticised the Coalition for not supporting the RBA review legislation.

GSFM investment strategy adviser Stephen Miller, who was previously a head of fixed income at BlackRock, backed the recommendations of the RBA review but said implementation was key.

“I think the model is probably a good one, but it all depends on how it is executed,” he said.

“You can stack it with people you think are sympathetic to whatever it is that you want to do, which undermines the RBA board, or you can be true to the purpose of the legislation.

“If you get a couple of academics, a couple of people from financial markets, a couple of people from union or business backgrounds…so long as it’s a diverse set of opinions from people who are properly qualified, I think that works.”

“But I think the utility of that model will be decided by how the government of the day executes the model.

“The most important thing will be in the institution, not in the design of the model.”