RBA board may lose rates decisions to monetary committee as part of central bank overhaul

Interest rate calls could instead fall to a ‘specialist monetary panel’ as part of a landmark review of the central bank.

RBA Governor Philip Lowe. Picture: NewsWire / Monique Harmer

The Reserve Bank’s decisions on rates could be devolved from the board to a specialist monetary policy committee, the panel of three independent experts charged with reviewing the central bank say.

In an event hosted by CEDA in Sydney on Thursday, ANU professor Renée Fry-McKibbin, former Bank of Canada deputy governor Carolyn Wilkins, and the Secretary for Public Sector Reform, Gordon de Brouwer provided an update halfway through their wide-ranging investigation into the RBA’s monetary policy framework, performance, governance, and culture.

The review is the first of its kind since the RBA began in the early 1990s to target inflation of 2-3 per cent over time, and Professor Fry-McKibbin said there appeared little appetite to abandon or substantially change the inflation goal.

“Most of the people that we speak to are in agreement that the flexible inflation targeting with an independent RBA has worked well for us over the last 30 years, and most people are telling us that they don’t really see any reason to change that,” she said.

“The messages that we’re hearing are that 2-3 per cent (inflation target) is about right – people are happy with that. But ‘on average over time’ is a little bit vague, and no one knows what that means. Maybe we could get some clarity on what the bank and the treasurer think ‘on average over time’ might mean.”

Professor Renee Fry-McKibbin. Picture: Supplied

In addition to rate decisions, the RBA board – like a typical company board – also has responsibilities around the general operations of the central bank.

Ms Wilkins noted that “many other central banks have separate monetary policy committees that all they do is think about monetary policy … and then there’s a separate board that does the usual governance of what’s happening in the enterprise as a whole”.

She said the comments the panel had received about “splitting” the RBA board “were more about the capacity of the board to do both, especially when the skills that are required are quite different.”

“It’s not a clear cut decision to take. I don’t want to leave an impression that we’ve made a decision (but) it’s a really important part of what we’ve been hearing.”

Panel members highlighted other common feedback, including the need for more specialist knowledge on the board, and how to formalise the relationship between the RBA and regulatory authorities such as the Australian Prudential Regulation Authority – the last particularly in the context of APRA’s previous interventions to cool the property market via lending restrictions.

Mr de Brouwer said there was “quite a strong feedback” asking whether the RBA’s communication around its policy decisions and monetary policy stance was “as clear and fulsome as it could be”.

“So the lesson that we take ... is being very clear about why policy is where it’s at, what it’s doing, and what it could do alternatively, and why it’s doing this, rather than that,” he said.

The Reserve Bank has come under fire for holding rates too low for too long, and for being too slow to recognise the building inflationary pressures which emerged early this year.

Mr de Brouwer said while there was a lot of “generosity” around how the RBA responded during the unprecedented health crisis of 2020, there were questions around the unconventional policy responses that were implemented after rates reached virtually zero.

“People would say that’s a very mixed report card around the yield target,” he said.

“The forward guidance, especially the time-based forward guidance around 2024, elements of the bond purchase program – there are some specific criticisms around that.”