Review of RBA should be independent, led by foreign expert, economists say

A group of economists including former board member Warwick McKibbin say the first RBA review in decades should be both independent and led by a foreign expert.

Reserve Bank Governer Philip Lowe. Picture: Lisa Maree Williams/Getty Images

Australian economists have called for the government’s proposed review of the Reserve Bank of Australia to be fully independent and led by a foreign monetary policy expert.

A review of the RBA’s practices and mandate was a key pledge of both major political parties ahead of the May 21 federal election, won by the Australian Labor Party.

Treasurer Jim Chalmers indicated last week that the review, which will be the first in decades for the RBA, might happen early in Labor’s term. The usual signing of a new operating agreement between the central bank and an incoming government would be delayed until after the assessment of the RBA is completed.

The group of economists from business and academia, which includes former RBA board member Warwick McKibbin, said the review might be undermined if its terms of reference are set too narrowly.

“It is critical that a review be conducted, but the devil is in the detail – poorly crafted terms of reference have the potential to undermine the efficacy of the review, and through it the future conduct of monetary policy,” the economists said in a letter to Mr Chalmers.

“Full independence is crucial if the review is to make the most of this unique opportunity … A foreign perspective would bring valuable external scrutiny to the process, and enable a benchmarking of the RBA against its overseas counterparts,” the letter said.

Demands for a review of the RBA grew rapidly over the last year amid criticism that it had undershot its 2 to 3 per cent inflation target for many years, and that the transparency of its policy decisions has been muddied by shifting guidance.

The terms of reference of the review should include a look at the RBA’s board structure and communication with the public; past performance; the interaction between fiscal and monetary policy; the Reserve Bank Act; and the central bank as an institution including its responsibilities, its structure and culture, the letter said.

The review is likely to attract a lot of public and political attention given that it will be carried out against the back drop of surging inflation, falling house prices, and the RBA’s first interest rate increases in over a decade.

The appeal from economists for the review to be carried out in the absence of government or central bank interference comes as their peers in the financial markets warn that the entire process might succumb to populism if it is not set up properly.

“The main risk is that of a populist push to broaden the RBA’s objectives beyond full employment and price stability to things such as housing affordability, equality and climate,” Shane Oliver, chief economist at AMP said last week.

“This would simply confuse the RBA and make it less likely to meet its main objectives. Such aims are the responsibility of government that has a broader tool set —not a central bank,” he said.
Central bank reviews in some other countries have been led by foreign experts. Examples include a review of the Reserve Bank of New Zealand in 2001; the Bank of England in 2000; the Riksbank in 2006, by Charles Goodhart and Jean-Charles Rochet in 2011, the letter said.

“The review presents a once-in-a-generation opportunity,” it said.
The Wall Street Journal