Brave new world for monetary policy as trailblazer Michele Bullock takes centre stage

RBA ‘lifer’ vows to reinvigorate the central bank’s culture and improve its economic performance.

Michele Bullock will begin her seven-year term as Reserve Bank of Australia governor on September 18. Picture: NCA NewsWire / Martin Ollman

Philip Lowe will preside over his final Reserve Bank of Australia board meeting on Tuesday, with the finance industry consensus that its decision will be to leave the cash rate target unchanged at 4.1 per cent, where it has been since early June.

The RBA governor’s seven-year term ends on September 17, his leadership traversing a relatively sedate monetary period, followed by the “unprecedented” crisis era of near-zero rates, to today’s pitiless “whatever it takes” squeeze on household and business borrowers to crush inflation, now in retreat.

Given the circumstances, Lowe has performed his duties well. There are certainly protests by technocrats about a lack of success in meeting inflation targets and rate settings pre-crisis. But the RBA’s scorecard is solid: par on a difficult course.

Still, in popular memory, the outgoing governor will forever be tied to the flawed “forward guidance” he provided to borrowers during the pandemic, who understood his message to be “no rate rises until 2024 at the earliest”. Nuance and intention be damned, for many this was a spectacular failure that doomed his tenure.

Interest rates may have peaked in this cycle – and may be on hold for some time – but the nation’s pre-eminent independent economic institution is at a turning point. How it conducts monetary policy, communicates its decisions and discloses the votes of board members is about to change, while fashioning a cultural refresh at a tricky time in economic management.

Incoming chief Michele Bullock, another central bank “lifer”, will steward the transformation, much of it arising from the RBA review, published in April, that was instigated by Jim Chalmers. The central bank is already moving on processes, with Lowe announcing in July that from February the RBA board will meet eight times a year rather than 11; its deliberations will run over two days, followed by a press conference headed by the governor to explain its decisions.

There will be changes to the central bank’s accountability, research priorities and management, as well as five-yearly reviews of the interest rate framework. Some former RBA executives see this as incremental, even cosmetic, a tick-a-box makeover by a custodian on the make; current officials say it’s an opportunity for the cultural revival of a closeted institution.

The Treasurer has been working on a new set of ground rules, or Statement on the Conduct of Monetary Policy, with the RBA leadership; the first revision since 2016 of that agreement between the Australian government and RBA, with the board rather than just the governor to be a signatory, will soon be finalised. Labor is also seeking bipartisan support for changes to the Reserve Bank Act. But the board has delayed some of the review’s most controversial recommendations – including the creation of a new expert advisory group on interest rates, publishing an unattributed vote count on decisions and more frequent public appearances by board members to discuss policy – until new legislation is passed by parliament and the monetary policy board is up and running.

Not everyone has welcomed the review’s findings. Sources with board experience told Inquirer the proposed nine-member monetary policy board would have only two members (the governor and her deputy) who worked full time at the bank, meaning “insiders” will lose control of interest rate decisions.

In Lowe’s penultimate public speech in July (his swan song is on Thursday in Sydney) he noted the current RBA board structure – and the review’s proposed model – “is unusual by international standards”.

“In our case, only two of nine board members are insiders,” Lowe said. “The other seven spend the bulk of their time outside the RBA and this will remain the case. This is a significant difference between the RBA and other central banks.”

While it does bring, as Lowe said, “a diversity of thought” to monetary policy decisions, former RBA governor Ian Macfarlane has called the move to empower part-time members “radical” and exceptional among central banks. Under the current arrangement the RBA executive drives outcomes but the review recommended a more contested space.

After the legislative process is completed, Lowe says there are four interrelated issues the new monetary board should consider as a package: the publication of an unattributed vote count; all board members making regular public appearances to discuss their thinking and decisions on monetary policy; the establishment of an expert advisory group to engage with the board; and board papers being published with a five-year lag.

Lowe argues there “is no universally accepted definition of best practice” on these issues. So, good luck with that!

Taken together, these and other mooted changes break new ground. In theory, the public’s knowledge around an arcane craft and accountability for interest rate moves will be enhanced.

You can feel the policy tension rising, as there are risks, and rewards, for all players in the new political economy of money. Some wise old owls, however, believe once the buzz dies down, the method of setting interest rates and communication won’t change much at all.

In any case there are other sea changes, almost literally, in monetary policy.

In a speech at the Australian National University this week, Bullock said a changing climate could lead to more price volatility and disruptive structural changes in the economy, making it more difficult to achieve the central bank’s mandate.

“The implications of the transition for the economy will depend on the specific policy measures put in place, changes in consumer preferences, the availability of technologies, and the timing and speed of the process,” she said.

“The phase-out of carbon-intensive production may reduce aggregate supply temporarily. But investment in alternative production methods will boost aggregate demand. Depending on how this transition plays out, if the net effect is to temporarily lower aggregate supply, this would put upward pressure on infla­tion.”

The psychology around central banking is also in play; the annual get-together in Jackson Hole, Wyoming, reflected a collective slump in confidence among the world’s monetary druids, who missed the inflation surge and whose models are proving to be obsolete. US Federal Reserve chairman Jerome Powell told the gathering the risks ran in both directions in the fight against inflation. Officials are caught between doing too much or too little. “As is often the case, we are navigating by the stars under cloudy skies,” Powell said. Or flying blind.

On Thursday, the governor-designate issued the RBA’s corporate plan for the next four years, saying “our focus will be on strengthening our monetary policy decision-making, improving the resilience of our nationally critical services and shaping the future of money in Australia”.

Like the Fed, our central bank warns high inflation, rapid interest rate rises and high household indebtedness create “a challenging environment for monetary policy”. “There is a risk of tightening policy either too much (causing unemployment to rise excessively) or too little (causing inflation to stay persistently high),” the new plan said.

In the question-and-answer session after her ANU speech, Bullock declared her top priority was (surprise, surprise) returning inflation to within the 2 to 3 per cent target band. The RBA’s central forecast is for that to occur in late 2025, with the unemployment rate creeping up to 4.5 per cent by the end of next year. That’s the “narrow path” the central bank is trying to stay on.

Her second priority is bedding down the review’s changes to policy processes and frameworks. “But there’s an equally important priority, which is to do with culture and leadership in the bank,” Bullock went on. “And one very important focus for me when I take up duties for the next few months is going to be working on getting action on that culture, in basically getting a culture of sharing and debate and respectful challenge – and that’s something that I’m very, very passionate about, and I’m quite determined that that’s one of my priorities.”

Bullock will be true to the spirit of the renovation but will do things her own way. For one, she does not carry the burden of being a long-term deputy, having been elevated to the role in April last year. Yet she has vast experience across the organisation and, after a procession of key departures, has few peers. The government seems fully invested in her success, although Bullock will have seen at close hand how far loyalty and respect go in politics.