Reserve Bank reforms poised to pass parliament, establishing dual board structure

Jim Chalmers’ planned reforms to the Reserve Bank are poised to pass the parliament after Labor secured enough votes for its changes in the final sitting day of the year.

Labor’s reforms to the Reserve Bank are set to pass the parliament. Picture: NCA NewsWire / Christian Gilles

Jim Chalmers’ planned reforms to the Reserve Bank are set to pass the parliament with the Albanese government securing enough votes for its changes on the final sitting day of the year, and possibly the parliamentary term.

The reforms, which follow a sweeping review of the central bank last year, will create a new dual board structure at the RBA, one charged with setting interest rates and another overseeing the RBA’s governance.

But in a break from the review’s recommendations, Labor is expected to vote in support of Greens’ amendments to the legislation which will retain two key aspects of existing legislation.

The first is the treasurer’s ability to override monetary policy decisions – as outlined in section 11 of the Reserve Bank Act – which has never been used in its 64-year history. Its abolition was recommended to safeguard the institution’s independence.

The Greens, however, demanded the power be retained, arguing its abolition would leave monetary policy decisions in the hands of “unelected technocrats”.

The second is the central bank’s power to direct the lending activity of commercial banks to certain sections of the economy – as contained within section 36 of the Banking Act. The power became redundant in the late-1990s when it was relinquished by the RBA and handed to the Australian Prudential Regulation Authority.

The left-wing minor party have called for this power to be retained so the RBA can direct credit into “desirable parts of the economy”, including renewable energy projects.

A spokeswoman for Senator Jacqui Lambie confirmed that the Tasmanian independent would support the legislation following discussions with economist Saul Eslake, while ACT independent David Pocock is similarly expected to support the changes, The Australianunderstands.

With support from the Greens and the two crossbenchers, Labor is set to have secured the 38 votes needed to pass its overhaul of the central bank.

The changes to establish the new specialist rate-setting board came after the RBA review found existing board members collectively lacked the expertise to challenge the interest rate decisions of the governor.

Negotiations with the left-wing minor party had previously hit a dead-end in September after the Greens’ economic justice spokesman Nick McKim advanced a series of fringe proposals.

That included creating a new objective for the RBA which would require it to consider the “maintenance of climate and ecological processes” in setting monetary policy and demanded that Dr Chalmers immediately move to cut interest rates in return for Greens’ support.

However, in negotiations on Thursday, these demands were dropped.

Dr Chalmers’ decision to rely on Greens support for his landmark legislation comes after the Coalition in September opposed Labor’s changes to the central bank.

While the Coalition had initially offered its support for the review’s findings, it later grew wary that Labor could “sack and stack” the proposed specialist rate-setting board, a fear fuelled by Labor’s appointment of two ex-union officials to the current board.

In an attempt to ease Coalition concerns, Dr Chalmers agreed to automatically transfer all six external members of the ­current board to the new monetary policy committee unless they expressed a desire to instead sit on a separate governance board.

However, after Jim Chalmers accused the RBA of “smashing the economy” via its aggressive run of rate hikes, opposition Treasury spokesman Angus Taylor relinquished the Coalition’s support.

Other recommendations of the RBA review, including that its board hold fewer meetings and that they are followed by a press conference from its governor, have already been adopted by the central bank.