Reserve Bank to call in experts for rate decisions

Reserve Bank interest rate decisions will be handed to a second board of experts, as part of a sweeping overhaul to be unveiled today.

Philip Lowe is expected to be replaced as RBA Governor. Picture: Richard Dobson

Reserve Bank interest rate decisions that affect millions of mortgage holders will be handed to a second board of experts, as part of an overhaul of the central bank that recognises a lack of technical skills has contributed to a string of policy mistakes over recent years.

The government will back all 51 recommendations in a report to be released on Thursday after a root-and-branch review of the RBA by a three-person panel, with Treasurer Jim Chalmers saying the country’s pre-eminent economic institution will be transformed to “ensure Australia’s central bank and monetary policy arrangements are as strong and effective as they can be into the future”.

Also looming over the report will be the future of RBA governor Philip Lowe, whose seven-year term ends in September.

Most experts predict the sweeping changes advocated by the review panel will require new leadership – potentially from outside the bank – and Dr Lowe is not expected to be reappointed when Dr Chalmers makes his decision around the middle of this year.

Anger at the RBA’s bungling of its “no rate hikes until 2024” guidance – among other high-profile errors that the central bank has admitted has damaged its credibility – has underpinned a broad mood for change, granting Dr Chalmers a public mandate to make changes to ensure it is “fit for the future”.

The long-awaited review, however, will reaffirm the RBA’s vaunted independence, as well as the inflation-targeting framework that underpins the rate-setting process.

Thursday’s report will recommend the creation of a specialist monetary policy-setting board that will sit alongside a separate governance board, in a change that will require a change to the Reserve Bank Act and so the support of the Coalition or crossbench to pass through parliament.

Dr Chalmers has made it clear he has sought bipartisan support for the review. Opposition Treasury spokesman Angus Taylor has received a number of briefings from the review panel and on Wednesday said he had had “constructive conversations with the government on the way forward”.

Mr Taylor said the Coalition’s contribution had been focused on ensuring the bank retained its independence and that its monetary policy approach stayed “laser-focused on returning inflation to the 2-3 per cent target”.

“The Reserve Bank of Australia has served Australia well for a long period of time. We want to make sure this crucial economic institution is maintained and that there are no distractions getting in the way of its core objectives,” he said.

The review panel’s recommendations are likely to touch all corners of the bank’s governance, communications, operations and culture. They could endorse the new board meeting only every six weeks – rather than monthly – followed by regular press conferences to bolster the bank’s accountability and to bring it in line with the practice of overseas peers such as the US Federal Reserve.

Dr Chalmers on Thursday will also announce two replacements to existing board members, and questions will immediately turn to the membership of the mooted monetary policy board, with Dr Chalmers having previously indicated he was open to appointing a union representative.

The RBA’s reputation suffered a huge blow last year after the central bank embarked in May on a traumatic series of 10 interest rises, only months after assuring Australians interest rates would stay at virtually zero until 2024.

Dr Lowe has since apologised for the bank’s failure to predict last year’s inflationary surge, saying he was sorry if the bank’s misplaced guidance had led borrowers to take on more debt than they otherwise would have during the Covid property boom.

He has also admitted that the messy end of other extraordinary policy measures in late 2021 – such as the Covid-era policy of pinning interest rates at 0.1 per cent out to three years – had damaged the RBA’s credibility.

Having kept rates too low for too long as the economy roared out of the pandemic, the RBA has also been accused of holding the cash rate too high during the “lowflation” years that preceded the health crisis, when inflation was stuck below the 2-3 per cent target range. RBA board member Ian Harper, dean of the Melbourne Business School, last week admitted that “with the benefit of hindsight … it looks like we did a terrible job” in meeting its objective during that period.

The current nine-member RBA board is chairman Dr Lowe, deputy governor Michele Bullock, Treasury secretary Steven Kennedy, and six “external” members – Dr Harper, CSL director Carolyn Hewson, Climate Council head Carol Schwartz, Wesfarmers director Alison Watkins, Fortescue Metals director Mark Barnaba, and CSIRO scientist Wendy Craik. Mr Barnaba and Ms Craik have said they would not seek reappointment.

The board meets every month except in January, with interest rates decisions reached through a consensus position, led by the governor. Critics have said the lack of economic expertise on the board makes it difficult for staff recommendations to be challenged. The board also has responsibility for the corporate governance of the bank.

The expert panel of ANU professor Renee Fry-McKibbin, former Bank of Canada deputy governor Carolyn Wilkins, and the Secretary for Public Sector Reform, Gordon de Brouwer, received more than 1500 contributions through interviews and submissions, focus groups and survey responses.

The panel consulted 137 global and domestic experts, including current and former RBA board and staff members, parliamentarians and academics. It also consulted with representatives of businesses, unions, public institutions and community groups.