Jim Chalmers’ RBA review fiasco shows how short-term politics bears long-term consequences

Treasurer Jim Chalmers in Canberra on Tuesday. Picture: NewsWire / Martin Ollman

He was a relatively new boy on the block when the recently installed Treasurer, Jim Chalmers, commissioned a review of the Reserve Bank of Australia.

A very busy and detached Canadian economist was appointed chair and the panel proceeded with addressing the terms of reference given to them by Chalmers.

Apart from the faulty forward guidance given by former RBA governor Philip Lowe and the excessive use of quantitative easing by the bank during Covid, it was never clear what deficiencies in the Reserve Bank’s performance were being addressed in the review’s recommendations.

Had there been a separate Monetary Policy Board, would the outcomes have really been any different? Just because several countries have separate monetary policy committees filled with narrow experts in macroeconomics and finance doesn’t mean this model would work for us.

After all, the functions of central banks are not identical around the world – the Bank of England retains the regulation of prudential matters, for instance.

The fact is that for nearly three decades, our independent RBA has, in the main, performed admirably.

And during most of that time, the government of the day and the bank have worked co-operatively to achieve good outcomes, including during periods of economic turbulence.

Now they say that governments should never commission reviews without knowing the recommendations – thank you, Sir Humphrey – but Chalmers fell into the trap of initially accepting all the recommended changes without thinking them through.

The first to be ditched was the proposed equal weighting to be given to inflation and unemployment. This would never work. If inflation was 10 per cent and unemployment 3 per cent, equal weighting would be a travesty.

That had to go.

There was also an (incorrect) assumption that the RBA can dial up a certain rate of unemployment by actively managing demand.

That proposition was discredited long ago.

The second mistake Chalmers made was to quickly appoint two Labor-affiliated mates to the existing board without due process. One of the more sensible recommendations of the review was that applicants to the two boards – Monetary Policy Board and Corporate Board – should be vetted against a list of criteria to ensure a well-balanced composition of members. Chalmers opted to ignore this, in this instance.

All along, Chalmers has maintained the need for bipartisan support for the restructuring of the bank but there was always a suspicion that what he really had in mind was stacking the MPB with his chosen candidates with more dovish attitudes to interest rate setting.

He would either ditch all other board members, save his latest two appointees, or send them to the Corporate Board (which sounds like being on the P&C at the local school).

Unsurprisingly, the Coalition’s Treasury spokesman, Angus Taylor, was not having a bar of this possible manoeuvre and sought assurances about ongoing appointments from Chalmers. There has been talk that two of the existing board members had been “persuaded” to move to the Corporate Board, giving Chalmers more scope to add his preferred candidates.

The crunch came last week when Chalmers explicitly undermined the independence of the RBA by claiming the economy was being “smashed” by high interest rates. (Actually, they are still low by international standards.) Enter former Labor treasurer Wayne Swan into the debate – “hammering households” and the bank “punching itself in the face” were not helpful remarks – and any trust between the Treasurer and opposition spokesman on RBA matters had evaporated. (Chalmers is wont to consistently, and unnecessarily, malign Taylor in parliament, hardly a sure route to obtaining his co-operation.)

Chalmers can now either drop the whole restructure – the best course of action – or negotiate with the Greens. In addition to the demand for the bank to retain the scope to direct credit given by the commercial banks as well as the ability of the government to override the bank, there is also likely to be a push by the Greens to include addressing climate change as a core objective of the bank. This must be resisted by Chalmers.

There have already been some changes to the way the bank ­operates that haven’t required legislation. There are now fewer, better timed, meetings, and the governor conducts a press conference after each one, thereby stealing the immediate narrative from the Treasurer. She is getting much better at this.

The statement of monetary policy has been improved and is also better timed.

All up, this has been a fiasco for Chalmers. He is clearly sweating on the cash rate being lowered at least once, if not twice, before the next election. But short-term political considerations should never have been part of the case for restructuring the bank. What is at stake is far too important.