Reserve Bank shake-up puts markets on edge as year ends

Reserve Bank governor Michele Bullock may have to contend with a completely new structure in 2024. Picture: Bloomberg

As the Reserve Bank heads into the Christmas/New Year break after a demanding year, it faces another year of potential turmoil in 2024.

If Treasurer Jim Chalmers goes ahead with his promises to set up a new monetary policy board, in addition to the existing board, it will be one of the biggest shake-ups of the Australian central bank in its history.

There are big questions about whether a new monetary policy setting board, made up of six outside members as well as the RBA governor and deputy governor and the secretary of the Treasury, will make any improvement to the board’s existing policy making structure.

Some of those taking a much closer look at the potential changes fear it could usher in a period of instability – or uncertainty to say the least – where the authority of the RBA governor and the bank could be undermined by six new outsiders.

Concern about the credibility and the operation of the new monetary policy decision making body – the core of any central bank – could lead to instability in financial markets, as players judge for themselves how serious the new committee will be in fighting ­inflation.

This year saw the then RBA governor Phil Lowe subject to appalling vilification for doing exactly what other central bankers around the world were doing – putting up interest rates to rein in rising levels of inflation.

Having made a mistake in forward guidance about likelihood of not putting up rates until 2024, Lowe went on to become the convenient political scapegoat for rate rises.

With the decision on the extension of his term dominating much of the year, the RBA was in one of its weakest positions politically than it has been for some time.

Phil Lowe kept his counsel on what he really thought of the proposed changes and continues to do so.

Former RBA governor Philip Lowe has not revealed his opinion on Treasurer Jim Chalmers’ proposed changes.

If he was not going to have his term extended, he had to keep his views to himself for fear of harming the chances of his deputy, Michele Bullock, getting the top job.

Fast forward to 2024, the big question is how fast will the government move on the appointment of the new-look monetary policy setting committee. Who will be on the committee? What stance will the members take?

Could the six independent members outvote the RBA members, putting the RBA governor in a position to defend a policy decision she does not agree with?

How will the requirement for members to make at least one speech a year on monetary policy impact on the credibility of the bank and its governor? Will it lead to confusion in the markets if members espouse publicly different views? Will the new requirement for the votes taken on the committee to be released publicly put pressure on the individual outside members for fear they could be criticised – or even vilified – for putting up rates or not putting them down, or not putting them down fast enough?

In the hothouse atmosphere of Australian economic policy, it has been hard enough for the veteran Reserve Bank governors to put up rates. Will any outsider, with their votes potentially to be made public, be able to take a tough stance on monetary policy if needed?

Opposition Treasury spokesman Angus Taylor was initially supportive of the Reserve Bank review.

But more recently he has been warning of the dangers of the current government stacking the new committee with its supporters. He would like the government to agree to an interim arrangement where the existing RBA board could become the new monetary policy setting committee to allow for a smoother transition.

“We are deeply concerned that Labor will use this as an opportunity to stack the board with its mates,” he said. “We want to see continuity in the board, incremental change, not a revolution.

“It is extremely important that the central bank has the confidence of the markets and the Australian people.”

But the government has considerable leeway to make the changes it wants in the shape of a new “statement on the conduct of monetary policy” which it is expected to make in conjunction with the RBA board next year.

Critics of the government and others expressing similar concerns point out that the two appointments made by this government to the RBA board – Elana Rubin and former Fair Work Commission president Iain Ross – are both former staffers of the ACTU.

Ross was a former assistant secretary of the ACTU under Bill Kelty while Rubin, a prominent company director and former chair of AustralianSuper, started her career at the same organisation under Kelty.

One of the biggest critics of the proposed changes has been former RBA governor Ian Macfarlane, who has expressed his views in several interviews and at least one speech during the year.

Chalmers says the new monetary policy board will have the same structure as the existing RBA board, so why the fuss?

But Macfarlane, who was RBA governor for 10 years from 1996 to 2006, argues that the current board is more like a conventional corporate board.

He argues that the new committee will be a big shift to a decision-making board, leading to a unique situation for the Australian central bank where the monetary policy decision making is done by a majority of outsiders.

In cases where central banks have outsiders involved in monetary policy decisions – such as the Bank of England – he argues, they are a minority, not a potential ­majority.

“If it goes ahead, Australia will have the only decision-making central bank in the world where the majority of the voting power rests with part-timers,” he told the Australian on Tuesday. “That is the essence of my argument. We will be a complete outlier.”

AMP economist Shane Oliver has similar reservations about the proposed changes. He warns that the review appears to be opting for a model closer to that of the Bank of England.

But he said the central bank had done a good job and there were concerns that the Bank of England model had not been a good one to fight inflation. He says it is not clear that other central banks have done a better job than the RBA in combating inflation and running monetary policy.

As Oliver points out, the world is now in an era of persistently high inflation – a time when central banks need to have credibility in the markets that they can take the tough decisions. “We need a central bank with a strong resolve to fight inflation,” he said.

The question is whether the changes to be made next year will achieve that.