RBA Review: Industry players have their say and it’s not flattering

The Reserve Bank Review should improve its governance, its interaction with private-sector economists and co-ordination with fiscal policy, according to submissions to a review.

Public submissions to the RBA Review drew a range of recommendations and common themes.

According to the submissions, the RBA should improve its board structure, governance and communications, its interaction with private sector economists and co-ordination with fiscal policy.

It should set formal limits on its use of unconventional monetary policy, take more account of climate change, give greater consideration to alternative monetary policy approaches and submit to regular reviews, according to the submissions released by Treasury on Wednesday.

The submissions include those of high profile-economists from both the financial markets and academia, public policy think tanks, business groups, trade unions, political parties.

CBA chief economist Stephen Halmarick sees the RBA Review as an opportunity to reinforce the important role the central bank has played in the Australian economy for the past six decades.

He favours the RBA’s current objectives and inflation target of 2-3 per cent “on average over time”.

CBA chief economist Stephen Halmarick. Picture: Hollie Adams

But he wants an updated 3-3-3 board structure to include three representatives from the RBA or Treasury, three from the “economy” and three economists or monetary policy experts.

Furthermore, an explicit reference to the role of fiscal policy in controlling inflation, better use of non-official data, insights and market feedback, and a formal arrangement for economists outside the RBA to present views and insights to senior members of the RBA and the board, should be set.

The cash rate should remain the main policy tool, and unconventional monetary policy like quantitative easing should only be considered once the cash rate approaches the zero bound.

The RBA has monthly policy statements, minutes, quarterly statements on monetary policy and numerous speeches. But Halmarick says the quarterly SoMP come out on the same day as the board meetings in February, May, August and November, along with a press conference.

Bringing forward the board minutes and giving more detail on the discussion, views and challenges at the meetings, an active two-way flow of professional economists into and out of the RBA to the private sector, transparently opening appointments to senior roles to the private sector, and implementing a review process every five years – including an update to the Statement on the Conduct of Monetary Policy – round out his wish list.

Former RBA, Treasury, OEC and Fed economist Peter Tulip who is now chief economist at the Centre for Independent Studies, said the RBA would make fewer, less persistent mistakes if more monetary policy experts were appointed to the board, if board members publicly explained their votes and if the bank were required to explain its decisions in more detail.

Australian Financial Markets Association senior policy director Damien Jeffree also called for governance reform within the RBA board to increase its monetary and markets expertise, and also for improved information flow to the board’s monetary process from the private sector.

In his view, the board should have multiple monetary policy economists and multiple experts in financial markets, given that financial markets are the mechanism by which monetary policy is implemented and that market data helps inform monetary policy.

ANU professor and former RBA board member Warwick McKibbin submitted a paper on the interaction of climate change and monetary policy and another on alternative policy frameworks.

ANU professor and former RBA board member Warwick McKibbin.

Professor McKibbin argues that while flexible inflation targeting has worked well in Australia, the nature of future shocks suggests that some form of nominal income targeting is worth considering as an evolutionary change to Australia’s framework for monetary policy.

Former RBA governor Stephen Grenville said monetary policy should return to the original concept of flexible inflation targeting – focused on a forward-looking forecast of inflation, with a recognition that it can do little to offset strong headwinds or secular stagnation.

In his view, the RBA didn’t have enough flexibility in the post-GFC environment to avoid cutting rates when recovery was held back by legacy balance-sheet problems and sustained budget austerity.

“Monetary policy was not the best instrument to stimulate the weak recovery: the other ‘arm’ of macro-policy — fiscal — was needed as well, and it was working in the wrong direction,” he said.

“Although monetary policy was largely ‘pushing on a string’, the framework encouraged central banks everywhere to continue pressing the policy rate lower, until zero was reached in the major economies – significantly negative in real terms.”

Former RBA governor Stephen Grenville.

“The real interest rate is the price of a valuable financial service, and a sustained negative rate is seriously distortionary,” he said.

“The RBA followed the global trend to lower rates but had resisted the final step to zero interest rates until Covid arrived in 2020, when the policy rate was then reduced to zero and other unconventional policy measures were implemented.”

“These had more downside than benefit,” Mr Grenville said. “When global inflation returned towards the end of 2021, the RBA faced the challenge of returning policy to a normal setting without disrupting an economy which had become accustomed to abnormally low interest rates.”

ANU and Oxford Professor David Vines said the RBA’s monetary policy responsibilities must be broadened to go beyond inflation targeting, and Treasury, the RBA, APRA and the Productivity Commission “need to co-operate better”.

University of Sydney Professor Adrian Pagan said the RBA’s forward guidance, outside a realistic time frame, “always seemed dangerous to me”. He said the RBA comments on future policies during Covid-19 were careful to make it clear that future actions could change in the event of unforeseen “future shocks, media reports and the public treated these as unconditional statements.

“That doesn’t seem likely to change and so forward guidance should be constrained,” he said.

On governance, he said monetary policy decisions and corporate governance issues need to be separated, with a Monetary Policy Committee created to focus on the former.

“We are in an era where there will need to be greater co-ordination of policies due to emerging issues such as climate change and the possibility of more emergencies,” he said.

Meanwhile, the RBA said a flexible inflation targeting framework remains “appropriate”.