The push to overhaul the Reserve Bank of Australia (RBA) could be a "watershed moment" in Australian economic policy, some economists say.
The Australian Council of Social Service (ACOSS) and unions have also welcomed the thrust of the recommendations to overhaul the RBA.
But some economists have expressed disquiet about elements of the coming changes, saying they will not all necessarily improve monetary policy-making in Australia.
Meanwhile, Treasurer Jim Chalmers has agreed in principle with all of the RBA review's 51 recommendations, and said he will try to make the necessary legislative changes by July 2024.
Some economists welcome the changes
The RBA review's final report, released on Thursday, called for major changes to the way monetary policymaking was conducted in Australia.
Importantly, it recommended reforming the RBA board that has responsibility for setting interest rates.
It said the RBA board should have experts with a range of experience in areas such as open-economy macro-economics, the financial system, labour markets, or the supply side of the economy.
The report said the board should meet eight times a year, rather than 11 times, to give its members time to think more deeply about the economy.
And it wants the RBA to increase its forecasting and modelling capability, particularly around the supply side of the economy and fiscal policy, to improve its overall decision-making.
It also said the RBA's objectives for monetary policy should be clarified as a "dual mandate" that requires the RBA to strike a balance between price stability and full employment, in both the short and longer term.
Overall, some economists have warmly welcomed the changes.
Monash University lecturer and former RBA economist Zac Gross said he was pleasantly surprised.
"My optimism about how much reform we would eventually get out of this process waxed and waned over the past couple of years, but this report — coupled with the opposition's solid backing — is about as good a result as I think we ever could have expected," he wrote on Thursday.
"It's a lengthy document, clocking in at almost 300 pages, but the main thrust is exactly right.
"The RBA should have a group of experts setting monetary policy, financial stability should not be an objective of monetary policy, [and] the RBA should be more transparent about its reasoning."
University of Melbourne professor of economics and former RBA economist Chris Edmond said the review could lead to historic changes.
"The reform of the RBA following this review should be a watershed moment in Australian economy policy, on par with floating the dollar in 1983, or the introduction of the flexible inflation target," he tweeted.
Chief economist of the Centre for Independent Studies think-tank Peter Tulip also welcomed the changes, having long called for a shake-up of the RBA's decision-making processes.
Meanwhile, the secretary of the Australian Council of Trade Unions, Sally McManus, applauded both the recommendation that the RBA put a stronger focus on its "full employment" goal and that the RBA's board should have some people with labour market expertise.
“With this review of the RBA and the inclusion of fresh expertise on its board, we look forward to economic levers being used to support working people and make Australia’s economy and workforce stronger and more equitable," she said.
The Australian Council of Social Service (ACOSS) said it would be a "hugely important step" when the RBA had to give equal weight to its inflation target and full employment when setting interest rates.
It said it had been pushing for that change for a long time and it welcomed the treasurer's commitment to supporting the moves.
RBA says some changes won't be revolutionary
RBA governor Philip Lowe said he did not see a problem with changing the organisation's charter to give it a "dual mandate".
He said the recommendation to make the RBA give equal weighting to price stability and full employment would not change much because the RBA already tried to achieve "full employment" by keep inflation under control.
The RBA report also did not recommend changing the modern definition of "full employment", so it will be left to the RBA to determine what full employment looks like at any moment in the economic cycle.
"I don't see those two things in conflict, because you can't have full employment if you don't have price stability," Dr Lowe said on Thursday.
"At the moment, we are trying to generate a return of inflation of 2 to 3 per cent, and the ultimate objective there is to make sure that people have jobs, and the country can operate close to full employment, so those two things are not in conflict.
"In the short run, there is a trade-off, obviously, but, in the long run, they are perfectly consistent, and the weighting that is given to each of them in decision-making is something that we can't determine from meeting to meeting, but they are not inconsistent with one another," he said.
Are there any problems?
However, some economists have raised concerns about aspects of the report's recommendations.
BetaShares chief economist David Bassanese said there were "grounds for concern" over how the new monetary policy board would operate.
"To the extent more board members will come from academia … there is a greater risk that policy will be set in an ivory tower, devoid of real-world appreciation of the facts on the ground," he said.
"It's also far from clear that academic economists, even so-called monetary economists, have any superior ability to form judgements on the correct level of interest rates.
"Indeed, the biggest criticism the RBA has faced in recent years was the conditional promise not to raise interest rates until 2024.
"This promise, itself, stemmed from a newly fashionable academic theory of "forward guidance" — whereby central bankers could help lower long-term interest rates without buying bonds or so-called 'quantitative easing', simply by promising not to raise short-term interest rates for an extended period.
"While nice in theory, this policy failed to account for the potentially disruptive impact on the economy if this promise then needed to be revoked due to changed economic circumstances," he said.
Meanwhile, the Greens' treasury spokesman, Nick McKim, said the recommendation to make price stability and full employment the dual objectives of the RBA reinforced the "mistaken belief" that interest rates were "the best and only tool for tackling inflation".
"The review has squibbed the opportunity to develop a holistic approach to economic policy, including the use of taxes and price caps to help manage inflation, and including by ensuring loans are directed to productive ends, such as the transition to a clean energy economy," he said.
