Workers will get a “voice” on the Reserve Bank of Australia board and the central bank will give equal weighting to achieving full employment and fighting inflation, according to wide-ranging changes following the first major RBA review in four decades.
The review’s report, released on Thursday, details 51 recommendations proposed by a three-person panel. The treasurer, Jim Chalmers, said the Albanese government “agrees in-principle” with all of them, and will now press on to implement them by July 2024.
Chalmers named two new appointments to the existing nine-member board: Iain Ross, a former Fair Work Commission president and former assistant secretary of the ACTU, and Elana Rubin, who has also worked with the ACTU.
“I think that workers do deserve a voice around the Reserve Bank table and I think that Iain Ross’s appointment today satisfies an important objective, which is to make sure that the wages and living standards of ordinary working Australians are considered and contemplated as the [RBA] takes its decisions,” the treasurer said.
In an attempt to bolster the expertise of those making interest rate decisions, a new monetary policy board will be set up within the RBA. As with the current one, it will be chaired by the bank governor, include the deputy governor, the Treasury secretary and six external members.
Those external members, though, will have “deeper economic and financial expertise, and more information, time and staff support to fully engage in the policy process”, the review recommended. A separate board will be created for managing the bank’s operations itself, such as currency issuance and IT issues.
Chalmers said it was not his intention to spill all the board members. Whether the existing RBA members would be on the new monetary board or the governance one would be determined later.
Instead of meeting 11 times a year, the monetary board would meet eight times a year, bringing it more into line with overseas peers. Greater accountability and transparency would be required, however, and with a chief communications officer appointed to enforce those objectives.
The RBA lifted the cash rate 3.5 percentage points in 10 consecutive meetings until this month – the sharpest increase in interest rates since it adopted inflation targeting in the early 1990s – with the bank’s minutes of its rates meeting indicating it may hike at least once more.
If the proposed changes are adopted, the RBA will have to emphasise reaching full employment as much as targeting inflation. The current framework of seeking to nudge inflation so it remains within a 2% to 3% band will be left largely intact although the reference “on average, over time” should be dropped as it “makes it harder to say whether or not the target is being met, limiting accountability”, the review said.
“The RBA’s objectives for monetary policy should be clarified as a dual mandate to contribute to price stability and full employment,” it said. “These objectives matter for the welfare of Australians, are enduring and are what monetary policy can best affect. Together they require the RBA to strike a balance between controlling inflation and supporting employment, in both the short and longer term.”
The definition of full employment will be the so-called non-accelerating inflation rate of unemployment. That gauge is “commonly used by central banks that represents the lowest rate of unemployment that can be sustained without fuelling excessive inflation”, the report said.
Chalmers said the government estimates full employment to be reached when the jobless rate is about 4.25%, although that gauge will change over time. Lowe said full employment probably implied a figure in the low fours. The unemployment rate in March was 3.5%, near a half-century low.
Chalmers said “the review found that the RBA is a well-regarded institution, with high quality staff, that has served Australia well”.
“It found that Australia’s monetary policy framework has contributed to good economic outcomes over the past three decades but identified a number of opportunities to strengthen it,” he said.
“Implementing these recommendations will ensure our monetary policy framework is the best it can be and boost confidence in our central bank.”
To ensure continuity as the changes are implemented, legislated changes should commence on or after 1 July 2024, the review said.
Along with Ross, Chalmers also appointed Rubin, from the corporate sector, to the board.
“Dr Ross will bring a deep understanding of labour markets and economics, having led the Fair Work Commission and as a private lawyer and as an advocate for workers as well,” he said. “Elana Rubin has over 20 years of corporate board experience across diverse sectors of our economy and extensive experience in financial services, infrastructure, property, tourism and manufacturing as well.”
Rubin is a non-executive director at Slater & Gordon, a law firm with close Labor party links. She is also a director of Telstra and Afterpay, and was chair of Australian Super and WorkSafe Victoria, and has worked for the ACTU.
The “skills matrix” of the new board “should emphasise practical experience and qualifications in the following fields: open-economy macroeconomics, the financial system, labour economics and the supply side of the economy”, the report said.
In a statement, the RBA said governor Lowe welcomed “the review panel’s support for the current monetary policy framework in Australia, including the flexible inflation target and the operational independence of the bank”.
The bank also welcomed the support for the Council of Financial Regulators and the explicit recognition of the RBA’s responsibility for financial stability.
The bank said the establishment of separate boards for monetary policy and governance of the bank “can help strengthen both the operation of monetary policy and the way the bank is governed”.
The bank will consider how it will alter the frequency of meetings and its approach to communication, and adjust to the appointment of a chief operating officer for the first time to improve its operations.
The recommended changes build a “strong foundation and strengthen the bank’s governance and decision-making processes,” Lowe said. “They will help us deal with the complex world in which we operate as we strive to promote the economic welfare of the Australian people.”
The report also recommended ongoing five-yearly reviews, jointly conducted by the RBA and Treasury, of the bank’s monetary policy framework and tools. Such reviews should include “transparent input from outside experts chosen to ensure a range of viewpoints is considered”.
