Jim Chalmers insists Reserve Bank review ‘not an attack’

The Reserve Bank of Australia’s performance, governance and mandate will be examined under an unprecedented and broad-based review.

Treasurer Jim Chalmers, left, insists the review is not an attack on the RBA, Picture: AAP

The Reserve Bank of Australia’s performance, governance and mandate will be examined under an unprecedented and broad-based review in the wake of the ­independent central bank’s ­response to the current inflation crisis.

Jim Chalmers will on Wednesday unveil wide reaching terms of reference for a formal review of the central bank, led by three leading economists, opening the door to a revision of the current inflation target as its key objective.

It will be the first review of the RBA in 30 years as the country deals with soaring inflation and ­interest rate rises. The terms of reference will examine the governance of the board and focus specifically on the central bank’s performance.

 

However, its primary focus will be on the “appropriateness” of the bank’s inflation targeting framework amid accusations that it has failed in its forecasting models.

The review panel has been asked to explicitly question whether the current inflation target framework is still appropriate, giving the Albanese government the potential broad scope for major changes to the RBA’s objectives and membership.

The Treasurer has been at pains to say that the review is not an attack on the bank and is ­designed only to ensure that it s fit for purpose as the nation faces the most challenging economic conditions since the early 1990s.

He said it was not a review of its policies, but rather its framework.

RBA governor Philip Lowe has drawn criticism for his comments late last year that official rates were unlikely to rise until 2024. The RBA began raising rates in May with an increase of 0.25 per cent and has followed with two successive 0.5 per cent rises.

The RBA’s minutes released on Wednesday flagged further rate rises as the central bank fights ­inflation.

In a keynote speech to The Australian newspaper’s Strategic Business Forum being held in Melbourne on Wednesday, Dr ­Chalmers will issue a reassurance that the review is not an attack on the independence of the central bank.

“This review is about renewing and revitalising the RBA, not revolutionising it,” Dr Chalmers said in a draft of the speech supplied in ­advance to The Australian.

“Given the tricky terrain we are in, I see this as a really good time to review and rethink the role of our monetary policy framework into the future. To review and rethink – and renew and refine where we need to.

“We’re not looking here at monetary policy in isolation, but how it works with fiscal policy.

“There’s a supply-side story here which goes to the costs and consequences of our choked supply chains.

“So the role of government isn’t just to make sure fiscal policy isn’t working at cross purposes on the demand side. It’s to recognise and respond to the supply-side pressures that inflame inflationary pressures.

“Higher interest rates can’t stop war, or grow more food, or produce more oil.

“They can’t fix a skills shortage, improve flatlining productivity or repair a broken energy market.

“That’s why the economic plan we took the election – the economic plan we have begun to implement – is a direct and deliberate response to these supply-side challenges.

“It’s about unclogging, unchoking, unburdening our supply chains – creating more capacity and lifting the speed limits on the domestic economy.”

The opposition, however, is concerned that any change to the RBA’s mandate on inflation to an emphasis on nominal GDP or wages, for example, would give rise to detrimental economic outcomes.

It has also raised concerns that a review of the RBA’s governance was code for Labor appointing union representatives to the independent board.

The review will be led by a panel of three experts from Australia and overseas, independent of the RBA and outside of the Treasury Department. It includes professor Carolyn Wilkins, an external member of the Bank of England and former senior deputy governor to the Bank of Canada, and professor Renee Fry-McKibbin, a leading macroeconomist at the Crawford School of Public Policy at the Australian National University and wife of former RBA member Warwick McKibbin.

They are joined by Gordon de Brouwer, an economist and former Treasury official who has previously served on the RBA.

“The Reserve Bank is a crucial economic institution which has served Australia well for more than six decades,” Dr Chalmers said.

Reserve Bank governor Philip Lowe. Picture: James Brickwood

“This is all about ensuring we have the world’s best and most ­effective central bank into the ­future.

“Australia is facing a complex and rapidly changing economic environment, as well as a range of long-term economic challenges.

“This is an important opportunity to ensure that our monetary policy framework is the best it can be, to make the right calls in the interests of the Australian people and their economy.

“The Review will consider the RBA’s objectives, mandate, the interaction between monetary, fiscal and macroprudential policy, its governance, culture, operations, and more.”

The review has been tasked with providing recommendations to government by March 2023.

Opposition Treasury spokesman Angus Taylor on Tuesday said that it was vital that the government ensured the review achieved the right outcomes.

“An independent, strong ­Reserve Bank, with clear goals, clear targets, particularly on inflation, is enormously important,” he said.

“It’s worked very effectively in the past. Peter Costello very much focused on that in 1996 when he put in place the 2 to 3 per cent inflation target, and we want to see that continue.

“We don’t want to see distractions for the Reserve Bank down rabbit holes that take it away from its core goal, which is to make sure that inflation is well managed, that they’ve got a credible target, that they meet those targets, that Australians can trust those ­targets. That’s the core goal, and we don’t want to see distraction from it.”