Labor to fast-track RBA interest rates ground rules … as soon as it decides governor

A new set of ground rules for how the Reserve Bank sets interest rates and secures low inflation with full employment will be fast-tracked by Labor.

RBA governor Philip Lowe. Picture: NCA NewsWire/Tertius Pickard

A new set of ground rules for how the Reserve Bank sets interest rates and secures low inflation with full employment will be fast-tracked by the Albanese government as soon as it decides who will lead the central bank in the future.

With a decision imminent on the tenure of RBA governor Philip Lowe, whose seven-year term expires in mid-September, the government will work quickly with the board to finalise a “Statement on the Conduct of Monetary Policy”, which it believes will improve the central bank’s independence, boost its inflation-fighting toolkit and clarify its mission, including a sharper definition of what success looks like.

It is understood an announcement could come as early as Friday, with government insiders saying Jim Chalmers was backing the appointment of a woman to head the country’s pre-eminent independent economic body.

The two leading candidates to replace Dr Lowe, who has attracted harsh criticism for the RBA’s flawed forward guidance on near-zero interest rates and its aggressive monetary tightening since May last year, are deputy governor Michele Bullock and federal Finance Department secretary Jenny Wilkinson.

The Treasurer, who will take a recommendation to cabinet on the governorship, has also been consulting with the opposition on the appointment and suggested changes to the RBA’s legislation, operations and monetary systems, as the central bank enters a new era with a dual mandate and embraces a cultural overhaul.

On Thursday, Peter Dutton said the government should not appoint a “familiar” senior public servant as governor, specifically citing the roles now held by Ms Wilkinson and Treasury secretary Steven Kennedy, another leading candidate who sits on the RBA board.

“The Reserve Bank governor has the independence because they need to make tough calls in our country’s interest, even if they’re unpopular calls,” the ­Opposition Leader said. “We don’t want somebody there who’s been involved in the political process at a senior level, and I think that’s a very important point to make, and we’ve made that clear to the government as well.”

Next week, the RBA governor will with the Treasurer attend a G20 gathering in India.

Dr Lowe has said he would be honoured to have his term extended but if it were not, he has indicated he would support his successor to make the transition. The three-person independent review of the RBA, which delivered its report to Dr Chalmers at the end of March, called for a refresh to the policy agreement between the government and RBA, now in its seventh iteration since 1996.

In setting monetary policy, the review recommended “equal consideration should be given to price stability and full employment”, with a new monetary policy board setting out its assessment of what was full employment.

The review stipulated the central bank should retain a flexible target of 2 to 3 per cent annual growth in consumer prices and aim at the midpoint of the target when significant deviations occurred, to maximise the chance of success and keep inflation expectations in check. “The current wording of the inflation target is that inflation should be between 2 and 3 per cent ‘on average, over time’,” the review said.

“The reference to ‘on average, over time’ makes it harder to say whether the target is being met, limiting accountability, and should be dropped. Instead, the RBA should be required to explain how it is using its flexibility.

“This should include how quickly it is aiming to return inflation to around the midpoint of the target, its assessment of full employment and how, if at all, financial vulnerabilities or other considerations have factored into its decision.”

This would better hold the RBA to account while allowing it flexibility to hit its dual mandates.

Dr Chalmers will also be seeking bipartisan support for amendment of the Reserve Bank Act in line with the review’s call for repeal of the power of government to override decisions of the RBA.

“This power detracts from the independent operation of monetary policy and the credibility of the monetary framework,” it said.

The current statement on the conduct of monetary policy was signed in 2016 between then treasurer Scott Morrison and Dr Lowe when he began his term.

Following a review after the 2019 election, including consultations between the RBA and Treasury, in November that year, former treasurer Josh Frydenberg concluded that “the existing statement is consistent with the government’s and RBA’s shared under­­standing of our monetary policy framework”. “Not changing the statement provides continuity and consistency at this time of global economic uncertainty,” he said.

In July last year, after Labor’s election victory in May, Dr Chalmers announced a broad-based review, the first since the current monetary policy arrangements were instituted in the 1990s.

During a speech in Brisbane on Wednesday, Dr Lowe revealed the central bank’s response to parts of the review, touching on accountability, research priorities, management, culture and five-yearly reviews to inform the policy agreement between the RBA and government. He said the board rather than just the governor would be the signatory to the new statement, “which is expected to be finalised later this year”.

The review by Carolyn Wilkins, Renee Fry‑McKibbin and Gordon de Brouwer placed great emphasis on the bank’s communications in proposing new ground rules, with the RBA obliged to explain “how long inflation is expected to be materially away from the midpoint of the target and why, how long labour market conditions are expected to deviate from full employment and why, and how it is balancing its two ­objectives”.

As well, it called for clearer understanding of the roles of ­interest-rate and budget policies, and better co-ordination and information sharing between the RBA and Treasury.

In April, Dr Chalmers said the revamped statement “will reaffirm the government’s commitment to the independence of the Reserve Bank and support for the inflation targeting framework”.

“It will also set out our shared understanding for strengthening decision-making, accountability and transparency in monetary policy decisions,” he said.

The RBA board has delayed a response to some recommendations until legislation is passed by parliament and the new monetary policy board is up and running.