Former RBA boss Ian ‘Big Mac’ Macfarlane says the bank reforms are bad policy

Former Reserve Bank governor Ian Macfarlane. Picture: Milan Scepanovic

Affectionately known as Big Mac by Reserve Bank staff in the decade through 2006 that he ran the institution, Ian Macfarlane emerged this week to shine a light on the federal government’s planned changes to how the central bank operates, warning that the reforms “are very bad policy.”

In a television interview with the ABC, Macfarlane argued that the changes outlined by Treasurer Jim Chalmers this year would mean the RBA governor, deputy governor and treasury secretary are outnumbered on the central bank’s policy-setting board by six external part-time members.

Macfarlane called the plans, which will be implemented over the coming years, “a leap of faith”.

He also highlighted Chalmers’ failure to subject the proposals, developed by an independent panel of three monetary-policy experts, to more rigorous public debate.

“People have been led to believe that the proposals are moving the Reserve Bank of Australia toward some sort of world’s-best practice. That’s not the case,” he said. “It proposes a model which is totally unlike any other central bank in the world.”

The changes would “greatly weaken” the governor, he said. “Future governors will have had a lot of the decision-making power taken away from them and handed over to the part-timers.”

Macfarlane dismissed the idea that the proposed changes were modest, saying they were “indeed radical”. “They put forward that we conduct an experiment that no other central bank has conducted, which is giving the part-time members of the board a majority of the votes in monetary-policy decisions,” he said.

Every other major central bank has full-time professional internal members who dominate the votes at the board level. In every case, the part-timers are a minority.

“Nobody else has tried that experiment,” Macfarlane said. If the plans progress as outlined, the RBA board is likely to be dominated by academics, which would add little to the decision-making of a central bank that is already very well credentialed, he said.

Macfarlane’s contribution to the discussion, while late, should be listened to with great care.

He has highlighted a reality that if the changes go forward, there is ample scope for increased confusion for markets and home buyers over the direction of interest rates – something the changes were supposed to improve.

Unlike the current system, the part-timers on the board will all be subject to demands for them to speak frequently to outline their policy biases.

The current system allows the governor to set the public agenda and announce the RBA’s guidance while being held directly accountable for the outcomes.

The new system will vastly increase the level of communication from the RBA board, which will have no constraints to ensure consistency around the message. It is a recipe for potential wild gyrations in bond yields and the Australian dollar, which would under-mine public confidence and lead to businesses potentially shelving investment and hiring plans.

Perhaps most damaging is that the proposed changes to RBA’s board appear to have been put forward in ignorance of the fact that the current system was instrumental in delivering nearly three decades of uninterrupted economic growth, punctured only by the Covid-19 pandemic.

In the shadow of the pandemic, it has helped deliver the lowest unemployment rate in nearly half a century. It is also a system that allowed the RBA to confidently work closely with federal and state governments to cushion the economic downturn during the pandemic. That co-operation might be impaired if dissenting part-timers on the board cloud the central bank’s messaging.

Chalmers should heed Big Mac and put the proposals out for a lengthier process of public debate.

There is no evidence the planned RBA changes will deliver better results.

Dow Jones Newswires