The most far-reaching overhaul of the Reserve Bank of Australia in decades will send a culture shock pulsing through the central bank, but its impact on interest rates for average borrowers and depositors alike will probably be marginal at best.
Because that’s not really the point, analysts say.
As signalled by its title, An RBA fit for the future, the review and its 51 recommendations won’t fix mistakes of the past. If implemented, those changes are designed to help the bank identify economic challenges sooner and be more nimble in dealing with them.
“Would interest rates be at a lower level now if we had the proposed structure 12 months ago?” says Jonathan Kearns, who headed several key RBA departments before leaving in February to become chief economist at Challenger. “Probably not.”
“Every central bank has increased interest rates,” Kearns says. “In fact, other central banks have increased interest rates by more than Australia.”
A jarring note in the review is the question of how well the RBA has been performing to date.
On the one hand, the review’s three panellists – Renée Fry‑McKibbin from the Australian National University, Carolyn Wilkins, an external member of the Bank of England’s financial policy committee and ex-deputy governor of the Bank of Canada, and Gordon de Brouwer, a secretary for public sector reform – reckon the bank has mostly done a good job.
“Australia’s economic performance has been strong in the three decades since flexible inflation targeting was introduced [with] inflation and unemployment both lower and more stable than in the preceding decades.”
The RBA is “a trusted central bank with a dedicated, high-quality staff … highly regarded domestically and internationally”.
On the other hand, its board lacks the expertise or commitment needed in an increasingly complex world. “The Reserve Bank board meets for a little under four hours and has limited policy discussion outside of this,” the review notes. “At other central banks, external monetary policy decision makers commit more time to the policy process.”
John Hawkins, a lecturer at the University of Canberra who has served as a senior official at both Treasury and the RBA as well as its Hong Kong equivalent, wonders if an element of cultural cringe hasn’t crept in.
“If you have a board that has more monetary policy expertise and less distraction by having to look at the sort of governance and managerial aspects of the bank as well, they’ll be more singularly focused,” Hawkins says.
“I think any improvement is pretty marginal because we’ve already had a very good performance in terms of the long-run average of inflation,” he says. The RBA has made mistakes “but they haven’t been bigger than other central banks’ and they haven’t made errors that are bigger than other forecasters’”.
Is there a strong case for cutting the number of board meetings a year to eight, for instance, compared with the current 11? “The only argument seems to be, ‘other central banks meet eight times a year’,” Hawkins says.
“Being able to move quicker and in small amounts if you’re unsure is better,” he says. “And the first Tuesday in the month gives us a regular pattern.”
One common practice overseas that might have been recommended would be to limit the role of the Treasury secretary to observer status when it comes to voting on interest rates.
“There are some potential conflicts of interest and questions around independence,” Kearns says. “There is a reason why other countries do not have their equivalents [of Treasury secretary] as a voting member … it just doesn’t look good.”
Similarly, had the reviewers been keen to emulate international counterparts, they might have recommended new board members commit to more than one day a week. The Bank of England, for instance, requires as much as three days a week to ensure members understand the issues, request research from assigned staff, and thoroughly probe matters before the board, Kearns says.
A side benefit of more days in harness might be reduced conflicts of interest. Those committing just one day a week are “going to be doing something else for the other four days”, increasing the likelihood of having additional interests to juggle, he says.
The pool of suitable talent will also have to be tapped regularly if the government accepts advice to limit terms of the six outsiders to the board to non-renewable five-year ones, with a possible one-year extension.
“In effect, that means you’ve got to come up with a new expert every year,” Kearns says.
That will keep the treasurer of the day busy – but perhaps ensure the new board remains fresh.
