Former RBA governor Ian Macfarlane hits out at ‘radical’ changes to central bank

Former RBA governor Ian Macfarlane has hit out at the government’s proposed changes to the central bank, describing them as ‘radical’.

Former Reserve Bank governor Ian Macfarlane has stepped up his attacks on the federal government’s proposed changes to the central bank, describing them as “radical” moves, which would “severely weaken” the authority of its new governor Michele Bullock.

“I hope these proposals don’t go ahead,” he told the Citi Australia Investment conference in Sydney on Thursday.

“If they do, it will make Michele Bullock’s job much harder than any of her predecessors and harder than any of her peer governors overseas.”

Mr Macfarlane, who was governor of the RBA from 1996 to 2006, said the proposed changes, announced earlier this year by Treasurer Jim Chalmers, were “completely contrary to world’s best practice” in central banking.

Under the changes, which were adopted following the recommendations of a three-person review of the RBA appointed by the Albanese government last year, the federal government will hand decisions on monetary policy over to a new nine member monetary policy committee, six of which would be external part-timers.

The other members would be the RBA governor, the deputy governor and the secretary of the treasury, all of whom are currently members of the existing RBA board.

The changes are set to go ahead next year.

Reserve Bank governor Michele Bullock. Picture: John Feder

Mr Macfarlane said this opened the way for the governor to be outvoted by the six part-time members on monetary policy decisions, which would make it difficult for governors, including Ms Bullock, to justify monetary policy decisions they did not agree with.

He said no other country had adopted the “radical changes” proposed by the government which, he said, shifted the balance of power away from the governor, towards the six part-time members.

“The review’s proposals entrusted two thirds of the voting power on monetary policy to six part-timers we know little or nothing about,” he said.

“That is why I call it a leap of faith.”

“We have no idea what we are going to get with this group of part-timers,” he said.

“It would be highly unlikely that this group would be able to make better decisions than the existing professional central bankers.”

While the treasurer has the discretion to appoint board members, the review suggested that members could include those “with expertise in financial markets, the labour market or the supply side of the economy.”

Mr Macfarlane said the suggested qualifications for the part-time members were so broad that they would “open the floodgates for just about anyone who has the time and inclination to apply.”

He said the treasurer had an opportunity to show his thinking on new RBA appointments recently when he appointed two new members to the existing board, who both came from a trade union background.

Treasurer Jim Chalmers. Picture: Emma Brasier

Mr Macfarlane said it was “inexcusable” that the federal government had agreed to implement all the recommendations of the review panel on the day its report was released, without any public discussions.

Treasury officials wrote the report for the review panel.

“On the day he released the report, he announced he would accept all the proposals.”

“I find this inexcusable,” he said.

“It was as though Canberra has decided (and) the rest of the country has to accept it.”

“The rest of the country only got to see it after it had been signed, sealed and delivered in Canberra.”

“But Canberra does not contain the main body of expertise on monetary policy and banking – Sydney and Melbourne do.”

Mr Macfarlane said most of the leading central banks in the world – those in the US, Europe, Japan, Sweden, and Switzerland- only had full time professional central bankers on their boards.

In four cases – in the UK, Canada, Norway and Japan – there was a mix of full time and part-time members, but in even case the full time members had the majority of the votes.

“No other country has anything like this,” he said.

“It is an untried experiment.”

Mr Macfarlane said the proposed changes would see the position of Ms Bullock and all future governors “severely weakened.”

He said it would be impossible for RBA governors to give a clear statement on the priorities for monetary policy when they appeared before parliamentary committees, as they would not know how the board would vote at future meetings.

“They would have to be vague, so the new board structure would damage the bank’s clarity of communication, even more so when the part-time members delivered their own public speeches. Similarly, if there was public anger over the direction of monetary policy, who should be held accountable.”

“Under the current system, it is the governor, as the recently-retired governor can attest.

“Under the proposed system, future governors could legitimately claim it was the part-time members of the board.”

Mr Macfarlane said governors would be in a difficult position if they had to speak publicly when outvoted on monetary policy decisions.

“They would find themselves as the public spokesperson for a monetary policy they had voted against.”

“How much conviction would their words carry?”