New era for Reserve Bank begins with first board meeting of 2024

RBA governor Michele Bullock. Picture: John Feder

When the Reserve Bank board meets for the first time in 2024 next week, the big focus will be on the comments by governor Michele Bullock in her first post-meeting press conference on Tuesday afternoon.

The good news that inflation in Australia eased back in the December quarter to an annual rate of 4.2 per cent has reduced fears of further interest rate hikes, with market expectations now that the RBA board could keep rates on hold for some months with possible rate cuts at the end of the year.

The big change this year will be the new look glasnost which Bullock will usher in as a result of the review into the central bank released last year.

While the review’s recommendation that monetary policy be decided by a separate board to the overseeing the bank is awaiting enabling legislation, it’s recommendation for longer RBA board meetings (but fewer of them) and more public discussion of its thinking will come into operation from next week.

The board will now meet on Monday afternoon as well as Tuesday morning, giving it more time to delve into economic issues and hear presentations from RBA staff.

For the first time, the statement Tuesday afternoon will be made in the name of the board rather than the governor, which has been the case in the past.

But Bullock will give more detail in her press conference, which will be closely watched for insights.

Parsing the difference between the monthly statements by the governor for shifts in view has become an art form in the past.

From next week there will be a lot more to digest on the one day.

Observers will be watching for any changes in the statement now that it is released in the name of the board, plus Bullock’s comments as well as examining the latest Statement on Monetary Policy which will now be released on the same day at every second meeting.

The Reserve Bank was already becoming more open under the governorship of Phil Lowe with more speeches and public appearances by the governor and senior staff.

There was a time when the bank only made a statement if it changed rates and did not release the minutes of the board discussion. But times are changing and demanding even more openness by the bank on its thinking.

The two half day board meeting will allow for more discussion between board members and RBA staff and more time to discuss possible scenarios which could result from different policy changes.

While the review recommended that the board be able to hear from a more diverse range of opinions from RBA staff, the real question is whether – in the end – it will mean any better decision making when it comes to monetary policy.

At the least it will give board members the chance to have a more rigorous discussion about policy options.

The shift to the new eight times a year format will also mean each monetary policy meeting will follow the release of major data – the CPI or the national accounts – which should allow for more informed decision making.

In the past, some meetings were held ahead of key data which was not ideal.

Former RBA official Luci Ellis, now chief economist at Westpac, says the new system will allow for more “rigour and more capacity to consider scenarios and risks.”

In theory more rigorous discussion should lead to better policy making – although the system in the past was not really broke and still served Australia well.

What is changing is the degree of communication around board decisions.

Monetary policy is a combination of what is done – mainly the changes in the cash rate – and how it is communicated.

“Jawboning” is a term used for central banks seeking to influence expectations with the comments of their leaders.

Done well, good communication could add to the firepower of monetary policy and hopefully reduce the amount of rate hikes needed to tame inflation.

After years of low inflation, Australia has moved into a new phase in the past year or so when expectations about inflation have taken off.

Consumers have become battle hardened to expect ongoing price hikes and, as the board noted late last year, companies which before Covid felt that they had to hold the line on price increases now feel freer to raise them.

It is a vicious circle which can then feed into the wage price spirals of the past in Australia.

The RBA has an official inflation target range of between 2 and 3 per cent, but this seems to have little impact on companies and sellers pushing up prices as hard as what they judge the market will bear.

If the deluge of information now available after each RBA board meeting can help rein in inflationary expectations it will be a good thing.

In a speech last November at the annual dinner of Australian Business Economists, Bullock said the changes were designed to “ensure our monetary policy framework is fit for the future”.

Bullock said the changes come as a result of the review but also after consultation with other central banks around the world.

She wanted the bank to be able to listen to a diverse range of views as well as being “open to fresh ideas from outside by increasing and diversifying our external engagement and leveraging the experience of people with external expertise.”

“I want us to be an institution that communicates well with both its people and the Australian public,” she said.

She said the new longer board meetings would allow for “deep and informed decision making”.

But that would have to be backed up “by explanations the public understand.”

Next Tuesday will see a lot more information available from the bank – potentially the most delivered on any one day.

Will it lead to better monetary policy in the end?

What it could lead to is more credibility for the central bank in a policymaker, market, media, and consumer ecosphere which is ever hungry for new information.

Nature, and public policy discussion, abhors a vacuum in the fast changing 24/7 digital information world.

There are risks, as Lowe found out in his suggestions in 2021 that rates might not rise until 2024, but if the changes improve the credibility of the bank and its ability to get its message across, they should be a good thing.