By Shane Wright
Treasurer Jim Chalmers may have to jettison a key element of his overhaul of the Reserve Bank as the Coalition and Greens drive a pushback against a planned revamp to the way official interest rates are set.
At a Senate hearing into a series of reforms to the RBA on Thursday, former treasurer Peter Costello, former bank governors Ian Macfarlane and Bernie Fraser and several prominent economists all raised concerns about ending the ability of the treasurer of the day to overrule a Reserve Bank decision.
Former RBA governor Ian Macfarlane says the government should not give up the power to overrule the bank.Credit: Oscar Colman
There was also concern about creating a separate monetary policy committee within the Reserve Bank that would set interest rates, splitting it from the bank board that would oversee its day-to-day operations.
An independent review of the RBA last year recommended major changes to the operation of the bank, including the creation of the separate monetary policy committee.
It also backed removing the power of the treasurer to overrule the bank. Under this power, which has never been used, the treasurer must report to the parliament their reasons for such a veto. The bank also has to make a statement to the parliament on the issue.
Costello told the Senate inquiry the government was surrendering its sovereignty if the overhaul took away the power of the treasurer to overrule the bank.
Costello, who said the bank was not infallible and had made mistakes around the timing of future interest rate increases, argued there was no reason to axe the power.
“Does parliament want to maintain some sovereignty in this area or not?” he asked.
Costello raised doubts over the separate monetary policy committee, arguing it could end up at loggerheads with the RBA board when it came to issues such as the purchase or sale of debt.
Fraser, who introduced the bank’s 2-3 per cent inflation target, said he was concerned about a committee of “super nerds” who would set interest rates, arguing they might look at inflation too narrowly.
He said he also believed the treasurer should retain the power to overrule the bank.
“I think the removal of this really risks the independence of the bank and its ability to perform,” he said.
Macfarlane, who headed the institution between 1996 and 2006, said retaining the treasurer’s power to overrule the bank would be important in the “once or twice a century” situation where there was an irreconcilable difference between the two.
“I think this would be a big mistake as it does play a useful role in the relationship between the Reserve Bank and the government,” he said.
But a member of the RBA review panel, Gordon de Brouwer, argued that axing the power to overrule the bank was in line with international best practice.
He said instead of the treasurer having the power, the entire parliament would now have the responsibility to disagree with the bank.
Fellow review panel member Renee Fry-McKibbin rejected the suggestion the new monetary policy committee would be dominated by economists and technocrats, saying it should be made up of a range of people with different skills to ensure the best possible decisions were made.
Macfarlane admitted that during his tenure at the bank there had been board members who were “political appointees” who had contributed little to policy debate.
Greens senator Nick McKim said he would introduce amendments to the proposed legislation to retain the treasurer’s veto powers, adding a decision on the monetary policy committee had not been made.
“Chalmers wants to throw renters, first home buyers and mortgage holders under the bus by getting rid of his powers to set interest rates,” he said.
Chalmers has been keen on getting bipartisan support for the RBA overhaul, with shadow treasurer Angus Taylor briefed during the review process and since.
Taylor said the Coalition was still concerned that there was no certainty if current RBA board members would go on to the monetary policy committee once it was established.
In a sign of the pressure growing within the Coalition over the plan to axe the treasurer’s power to overrule the Reserve, Taylor said a final position would depend on the Senate committee.
“The Coalition will consider its final position through party processes once the committee delivers its final report,” he said.
Chalmers backed the RBA review and its recommendations.
“The RBA review and the government’s response is all about reinforcing the independence of the Reserve Bank,” he said.
“We will carefully consider this development and respond in due course.”
Cut through the noise of federal politics with news, views and expert analysis. Subscribers can sign up to our weekly Inside Politics newsletter.