Reserve Bank expected to face a major shake-up under the recommendations of a review

The report is expected to seek greater transparency by the RBA and put monetary policy into the hands of a new board.

The Reserve Bank of Australia faces one of its biggest shake-ups in its history, taking the setting of interest rates away from its board which has made the decisions on monetary policy – and putting it in the hands of a new, separate Monetary Policy Board.

The changes follow the largest review of the Reserve Bank since the Wallace inquiry recommended in 1997 that it should no longer have control over regulation of the banking system.

Federal Treasurer Jim Chalmers, who commissioned the review last July, has announced his in-principle agreement for the 51 recommendations of the report, titled An RBA Fit For The Future.

While the report, to be released on Thursday, is expected to canvas a range of issues, such as pushing the central bank for more transparency and potentially encouraging more outsiders to come into the bank, the major change will be the establishment of the Monetary Policy Board.

The Reserve Bank has been unique in having its board carry out both the conventional operations of a company board, overseeing its governance, as well as deciding monetary policy.

The nine-member Reserve Bank board is a combination of representatives from the RBA – the governor and the deputy governor – the secretary of the federal Treasury and six external board members appointed by the federal Treasurer.

While it is open to the Treasurer to appoint who he or she thinks fit as external board members, the practice has been to appoint people in business – with a spread of representatives from across the country – rather than those chosen for their monetary policy expertise.

Former ACTU president and prime minister Bob Hawke was a member of the RBA board.

Famous board members in the past have included then ACTU leader Bob Hawke, who went on to become prime minister and credited his time on the board as providing him with invaluable experience for his future role.

In theory, it would be open to the Treasurer of the day to confine the appointments to economists or people with monetary policy expertise under the current arrangements.

But this has rarely happened, and governments have preferred to appoint people from the business community.

The model has led to some complaints that the Reserve Bank representatives could dominate the board by force of their economic expertise and that of the bank, against the well-meaning comments of business representatives who have no economic background.

While the RBA does release the minutes of each board meeting a week later, it doesn’t provide information over the voting patterns of the individual board members.

RBA governor Philip Lowe. Picture: Gary Ramage

The new system, which will bring Australia more into line with central banks in the US and the UK, will result in monetary policy being set by a combination of representatives from the bank and external economists.

More details about the proposed composition of the board will be in the review. The review’s panel has included Canadian Carolyn Wilkins, an external member of the financial policy committee of the Bank of England and a former senior deputy governor at the Bank of Canada; Professor Renee Fry‑McKibbin, an economist and interim director of the Crawford School of Public Policy at the Australian National University; and Dr Gordon de Brouwer, an economist and the secretary for Public Sector Reform.

The policy to date has been to not appoint any member of the banking community to the RBA board as it could give that bank a potential advantage in having an insider in the RBA’s monetary policy deliberations.

Bank of England financial policy committee external member Professor Carolyn Wilkins.

It is believed this will also be the case with the new board.

Appointing someone who ran their own economic consultancy could also be problematic, again giving them an unfair commercial edge. This could leave the positions largely filled by academic economists.

In the US, central banking is based on a federal system, with the Federal Reserve board based in Washington supported by a series of regional Feds in major cities including New York, Atlanta, Chicago, San Francisco, Dallas, Richmond and Cleveland.

Its monetary policy setting committee is the 11-member Open Market Committee which includes the national chair of the Fed and the chair of the New York Fed, five governors of the bank and four representatives from the regional Feds (currently Chicago, Philadelphia, Dallas and Minneapolis), appointed on a rotational basis.

The unique federal structure of the Fed allows this to happen, but the RBA has a very different structure, largely confined to its headquarters in Sydney’s Martin Place.

The Bank of England’s monetary policy committee is made up of nine members – the governor of the bank, three deputy governors for monetary policy, financial stability and markets and banking, the bank’s chief economist and four external members appointed by the chancellor.

The current external members are Swati Dhingra, an associate professor of economics at the London School of Economics, Jonathan Haskel, professor of economics at Imperial College Business School, Catherine Mann, the former global chief economist at Citibank who is a professor at Brandeis University, and Silvana Tenreyro, professor of economics at the London School of Economics.

Professor Renee Fry-McKibbin, interim director of the Crawford School of Public Policy at the Australian National University.

These appointees are subjected to strict guidelines on what they can say publicly and when (including being bound by a “quiet period” nine days before monetary policy decisions) and are subjected to a code of practice covering conflicts of interest.

The committee’s published minutes include the voting track record of all its members.

The Bank of England model gives some idea of what could happen in Australia in the wake of the review and the types of people who could be appointed as external members.

It seems the Albanese government is determined to make changes, but the real question will be whether it results in a better outcome than the current model.

There is a natural attraction to the idea of recommending that Australia follows what is done elsewhere – as was the case with the Wallis inquiry recommendation to strip the RBA of its oversight of the banking system.

Central banks are never liked when they increase interest rates and Reserve Bank governor Philip Lowe has attracted criticism for doing his job.

Economist and Public Sector Reform secretary Dr Gordon de Brouwer.

His problem, of course, was the guidance given by him and the bank in its comments and minutes in the depths of Covid-19, when he said it was unlikely the RBA would raise interest rates until 2024 – comments which will probably mean his seven-year term wont be extended beyond September 17 this year, as was done for two of his predecessors.

Another criticism of the Reserve Bank was whether it should have moved earlier to increase rates in the latest tightening cycle.

A committee of professional economists could prove to be more hawkish than one made up of two RBA representatives and outsiders from the business community, taking a more aggressive stance on raising interest rates.

It is important to separate out the fact that the public never likes rate rises – and the people who decide on them – from the correct function of a central bank.

The current setting for monetary policy in Australia is not broken and has, by and large, served the country well.

There will be a transition time as the market gets used to the new board.