The first review of the Reserve Bank of Australia in decades began taking submissions on Thursday, a day after the release of an issues paper detailing the main themes it will explore.
Here are four key areas to watch ahead of the review making its recommendations to the treasurer, Jim Chalmers, next March.
Inflation targeting
According to the Reserve Bank Act 1959, its objectives include stability of the dollar, maintaining full employment and promoting the “economic prosperity and welfare of the people of Australia”.
Since the early 1990s, the RBA governor and the treasurer of the day have also jointly agreed “that the appropriate target for monetary policy in Australia is to achieve an inflation rate of 2 to 3%, on average, over time”.
So the bank has flexibility to allow inflation to temporarily fluctuate outside that band. Depending on your flavour of inflation, consumer prices were running at an annual clip of 6.1% in the June quarter, while the underlying rate was 4.9% – proof of that flexibility.
The review will assess how the act and statement work together. Should the “over time” period be made less vague, and how should the RBA balance inflation and employment objectives when setting rates?
John Hawkins, a senior lecturer at the University of Canberra and formerly at both Treasury and the RBA, said there was a time when the bank was seen as “a bit wimpish” for not having a rigid inflation target. Now other central banks are looking to follow Australia.
“The idea that the governor is expected to commit ritual disembowelling for letting the inflation rate fall below 2% or rise above 3% is seen as too extreme and not conducive to good policy,” Hawkins said.
Who’s on the board
While independent, the board of nine is ultimately selected by the government.
The bank’s governor and deputy governor are appointed for terms of up to seven years and are eligible for one reappointment, and the treasury secretary serves at the government’s pleasure.
Six other members are appointed for terms of up to five years without limits on their tenure, and at least five of them cannot be RBA staff.
One change may be to ensure greater diversity, such as tapping a trade union member (as during the Hawke-Keating years) or someone with a social service pedigree, rather than drawing largely from business.
Similarly, having a monetary economics expert “might be better able to challenge the view of the governor” than those with expertise in other facets of “the dismal science”, Hawkins said.
Voting disclosure
For now, the RBA’s rate decisions are mostly by consensus rather than by votes as made public by central banks such as the Bank of England or the US Federal Reserve.
Since the explanation of decisions and future intentions is often as important as the verdict itself, the review will probably recommend improving transparency of board operations.
Hawkins says it would be helpful to know whether a move to lift or cut interest rates was a 5-4 split rather than a 9-0 decision not least because it may help understanding what’s coming in future meetings. Knowing how individuals voted, though, might raise other issues, such as if a union member acted at odds with the wider union movement’s policy, making a case for some anonymity to remain.
Bracing for future shocks
An internal assessment of the bank’s actions during Covid – including buying up bonds worth $280bn – or 13% of GDP – to keep interest rates down will be complemented by this review.
This and other supply disruptions may be “more prevalent in the future”, the review issues paper said. These may because of “global economic integration [and] geopolitical tensions” (read, China and Russia, in particular), or natural disasters related to the climate crisis.
In light of the latter, one issue raised is “the appropriate role of central banks, if any” of steering nations to a “lower carbon economy”, the paper said.
Given Australia has a net zero target, the review will have to go even further.
One question will be how much should be left to sister agency, the Australian Prudential Regulation Authority that has oversight of banks’ exposure to climate risk, Hawkins said.
Still, with Australia a major fossil fuel exporter, the RBA won’t be able to sit idle if large parts of the economy become stranded.
