One justification for the Reserve Bank review was its ill-considered forecast of there being no changes in interest rates until 2024. This quickly became a critique of the way it had “lost” control of inflation, thus forced to make 10 rate rises in rapid succession.
In terms of partiality and ignorance, the attacks on the central bank had all the hallmarks of Tony Abbott’s attacks on the Rudd and Gillard governments. Now they have won. A three-person committee has delivered a report and poor Treasurer Jim Chalmers will later today announce wholesale changes to the central bank and its rate-setting mechanism.
These include the Reserve Bank board being stripped of its power to set interest rates and replaced instead by a board of monetary policy experts. It’s the biggest shake-up to Australia’s economic policy settings since the 1990s when the RBA became officially independent of the federal government.
Designed by committee
The change would bring the central bank into line with its international peers, such as the Bank of England, media reports have said. That’s not too hard to understand given that Professor Carolyn A Wilkins, an external member of the financial policy committee of the Bank of England until 2024, is a panel member of the RBA review.
All those supporting these Chalmers-led changes — this committee addition in particular — are in for disappointment.
The Bank of England has a governance board and then a monetary policy committee made up of internal and external economists. But its current record is pretty poor. In fact, at the moment, it could be argued its committee has lost control of inflation.
The RBA, on the other hand, has managed to get inflation down from a peak of 8.4% (according to the Australian Bureau of Statistics monthly indicator) to 6.8% in February. That is significantly better than the Bank of England’s performance, where the monthly inflation rate remained (surprisingly) above 10% in March and February.
The RBA’s inflation peak has also been lower than in the UK and US and on a quarterly basis — 7.8%, lower than in Canada. In fact, the British inflation rate peaked higher than Australia’s at 11.1% last October and hasn’t been under 10% since September 2022. February saw a surge back to 10.1%, led by a 17.5% jump in food and came in at 10.1% in March when it was forecast to fall to 9.8%.
Welcome changes
Chalmers’ changes to the board will be long overdue. For too long the RBA board (excluding the governor, deputy governor and treasury secretary) has been dominated by out-of-touch business people.
Current board members Wendy Craik and Mark Barnaba have their terms finishing this year. Barnaba’s board membership in particular is indicative of the problems, not because he is a board member of Andrew Forrest’s Fortescue Metals Group and other organisations, but because he is a board member of the Centre for Independent Studies (CIS), a conservative and highly partisan think tank.
Alison Watkins, a former chair of Coca-Cola Amatil and non-executive director of Wesfarmers (a breeding ground for Business Council board members) is also a board member of the CIS.
Why the Coalition governments of Malcolm Turnbull and Scott Morrison didn’t insist on both relinquishing their board positions at the CIS is quite astounding. No other board member has a similar position — especially on the left or even the centre of politics.
It is appalling the CIS managed to get two of its board members on the Reserve Bank board when there was no one to represent an even larger but less-represented group, labour. And there is no one representing small businesses either.
This alone has made the RBA board look very neoliberal, right-wing and out of touch, especially when it comes to the sensitive issue of wages growth — real and nominal. The RBA was, in fact, hopeless.
