In the first instance, there are real questions about whether a new “governance board” is really needed for the Bank in addition to its current board which spends most of its time deciding on interest rates.
In a scathing assessment, former Reserve Bank governor Ian Macfarlane has questioned the need for the new board which he describes as “useless” warning its directors would be the “B team board” to the “A team” members of the monetary policy board.
He warns that any move by a current RBA director to the new governance board would be a “demotion” and should not be forced either overtly or behind the scenes in any way the Treasurer.
He argues the change is beyond his current powers under the RBA Act and would also fly in the face of the review of the Bank itself which recommended that each current board member make up their own mind about which board they wanted to serve on.
Former Federal Treasurer, Peter Costello, and former long time chair of the Future Fund, has also questioned the need for a second RBA board in his recent interactions with the Senate committee.
He has raised concerns about the extra work involved for staff in having to support two boards and the potential for problems to arise between the two boards when it came to areas like responsibility for the bank’s balance sheet.
He also pointed out that there is not that much for a governance board to do given the fact that the RBA has no supervisory control over the banking system in the way that other central banks, such as the US Federal Reserve Board, do.
He said the board only has one shareholder - the government - not like the boards of listed companies.
The second issue is the real worry that if the government wants to use the establishment of a new board to move some of the existing RBA directors to the new “governance” board, giving it the room to “stack” the monetary policy board with new members, that confidence in the existing monetary policy setting system could be undermined.
The Treasurer, Jim Chalmers, whose department is already advertising for the six new positions, despite the fact that the enabling legislation has not yet been passed by the Senate, has defended this scenario, arguing that some current board members should be moved to the governance board on the basis of the need for “continuity.”
In her appearance before the Senate recently, Governor Michele Bullock, talked of the need for “stability” on the crucial monetary policy board.
But in an answer to a question at her press conference this Tuesday, Bullock appeared to back Chalmers, saying she would like to see “continuity with respect to both boards”.
As Macfarlane commented, how could “continuity” be an issue for the governance board which has not even been set up yet?
The Reserve Bank’s independence from the government of the day has been hard fought and hard won and is critical to its long term effectiveness.
The market needs to be confident that the Bank will take the right decisions on monetary policy which means being free to take tough decisions on rates- increasing them when needed and only reducing them where it feels inflation is under control.
It should not be seen to be pandering to the wishes of the government of the day.
The Treasurer of the day does have the right to appoint RBA governors and deputy governors and board members-but any perception that the Bank or its monetary policy setting arm is somehow in the pocket of the government is moving into very dangerous waters.
The review of the Bank was commissioned by Jim Chalmers in his early days as Treasurer with the three person panel, headed by a Canadian central banker working closely with his department.
There was not a lot of public scrutiny of the process and Chalmers announced as soon as it was released -without any public debate- that he would be accepting its recommendations.
The Opposition was slow to act on the process, with its Treasury spokesman Angus Taylor, appearing to back the idea of “bipartisanship”.
But it appears to have woken up to the real concerns about the motives behind making “reforms” to the Bank when there is no real need to do so.
It is hard to see just what are the problems that Chalmers is trying to solve for in his proposal for a second RBA board.
Former Reserve Bank governor, Phil Lowe, was pilloried for his decision to give “forward guidance” on rates in the depth of Covid in 2021 saying he saw it unlikely that they would rise until 2024.
But the lessons of this exercise have been well learned by the Bank, with Bullock firmly insisting this week that she would not be giving any guidance on rates.
If that was the problem to be solved, it has already been.
Lowe’s comments, which were made with the best of intentions and with the best information from the Bank itself at the time, cost him a possible extension of his role as governor.
But they also show how easily the Bank’s reputation can be tarnished and why its credibility- and independence from government- needs to be fiercely defended.
Of course it also suited the governments of the day to see Lowe targeted and personally vilified as the bad guy for putting up rates at a time when almost every other central banker around the world was doing so- several much more aggressively.
The attacks on Lowe are a reminder of the pressures any future governor will come under if inflation resurges.
Bullock’s two press conferences this year have been an exercise in reporters pressing for assurances of future rate cuts and reminding the governor of the hardships of high interest rates.
If the second RBA board is set up and the new look monetary policy board with new appointees moves to disclosing votes on their decision making, it could become increasingly difficult for the board to defy populist pressures.
There will be much analysis about the new composition of the board- who is on it and how they voted and if they are prepared to outvote the governor of the day.
The fact that the current government’s two picks for RBA board slots are former ACTU executives has not been lost on its critics and for those seeking guidance on where the six new potential candidates for RBA board slots could come from.
If Chalmers goes ahead with his current plans, the existing ecosystem of Reserve Bank watching will have another dimension of spotlighting the internal machinations of its decision making process, looking for any cracks and divisions.
The current credibility of Australia’s central bank and its monetary policy setting process is too important to be politicised.
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The current proposals to set up a new governance board for the Reserve Bank, in addition to its current powerful monetary policy board are moving into dangerous waters.