The public’s expectations for the review of the Reserve Bank were high. Some hoped it would mean an end to crippling interest rate rises. Others saw the prospect of staff and board members being held accountable for the false and misleading forward guidance that had suggested interest rates would remain around historic lows until 2024. More broadly, it was expected there would be a detailed assessment of the role of monetary policy and the quality of its contribution to overall economic management.
However, the review didn’t directly address these issues in its 51 recommendations, all of which the Albanese government has accepted in principle. They were mostly about structural reform of the bank, which has been described – not wanting to be unkind – as somewhat dysfunctional. This is about the future, setting the RBA up for a better performance and not dwelling on the past.
The main structural changes the review suggests relate to the management culture and conduct. It recommends the establishment of two boards – one focused on the conduct of monetary policy and the other on the improved governance of the bank overall – both with complete independence from the government.
The review also recommends the adoption of dual objectives for monetary policy, namely both inflation and employment. While I am sure that the governor would claim that employment has always been one of his objectives, as per the RBA Act, he needs to spell out the links between these objectives and how he sees interest rate policy working to achieve them.
The monetary policy board will see the appointment of a range of monetary and macro policy experts, to bring the best expertise and experience to bear on interest rate decisions. It’s sensible to replace generalist experience with focused expertise, but the choice of members must be made carefully to strike the right balance among the differing views of a range of professional economists. It is hard not to recall the old joke that if you were to lay all the economists in the world end to end, you still wouldn’t reach a conclusion. Contestability will be the key here – that is, ensuring that a diversity of contributors are able to document and vigorously argue their case.
Clearly the focus should be not on only academic economists, as many won’t have much relevant lived experience. Their deliberations will be only as good as the data, evidence and modelling on which their discussions are based. The RBA, along with Treasury, has a very poor track record of economic forecasting, especially where there are significant structural shifts in the economy. The models they use are incapable of predicting, say, another global financial crisis. Indeed, any attempt to model the unfolding of a GFC will probably mean adding such an event to the existing models as an external shock, and the mechanism chosen to do this will probably be too definitive. A major weakness of economics is the increased reliance on assumed mathematical precision. The reality is that although the profession has become more dependent on what may be called scientific – mostly mathematical – methods, informed judgement is, to my mind, a more important ingredient in good policy development and implementation. Members of the proposed monetary policy board should work closely with RBA staff, particularly in the economics department.
It will also be important for this board to understand the position of monetary policy in overall economic management. The review makes much of the need to effectively link monetary with fiscal policy – a key recommendation. I suggest that another effective way to do this would be to involve the governor in cabinet budget deliberations. It was a feature of economic decision-making in the Fraser government – mostly via the monetary policy committee of the cabinet – to call on the governor to address intended decisions rather than simply to leave him stuck with the Treasury advice – hardline and narrow as it usually was.
An alternative mechanism to achieve effective co-ordination across the various streams of economic policy would be for the government to appoint something similar to the United States president’s Council of Economic Advisers, which has its own research capability.
The review also makes a crucial point about the need for each decision by the monetary policy board to be announced subsequently at a press conference, with members encouraged to publicly explain their deliberations. It will also be important to release the voting numbers, so the public is aware of who supported what.
A particular concern I have about the RBA’s conduct of monetary policy – about which I have written on many occasions – is that members seem to believe they can fine-tune interest rates to achieve their desired outcomes in terms of inflation and employment. For instance, they seem quite arrogant about their role in the inflation slowdown through the 1990s, while I suggest that had more to do with China as a manufacturing hub flooding the global economy with cheap products. More recently, RBA members have concentrated on rapidly raising interest rates to curb inflation when, by their own admission, the supply side has been a major source of price pressures, with the breakdown in supply chains during the pandemic, the global explosion in transport costs, the Russian invasion of Ukraine and so on.
The other proposed board is a governance board separate to the monetary policy board. There’s no doubt there have been significant governance failures at the RBA, perhaps the best example of which was the Note Printing Australia and Securency scandal related to a conspiracy in 2011 to bribe foreign officials to market their banknote printing capabilities.
A traditional corporate board has two very clearly established governance roles: to sign off on the overall strategy of the company and to appoint the chief executive and senior management team to deliver that strategy, with specific key performance indicators to hold them accountable.
The RBA board doesn’t appoint the governor; the government does. Clearly, for this board to have substance they should be allowed, if not required, to report their assessments of the governor’s performance, and that of their team, to the government of the day. There should also be an annual review of the performance of directors.
One recommendation of the review that has been largely ignored in public commentary is the removal of the government’s effective veto power over RBA decisions – section 11 of the Reserve Bank Act. The review recommends dropping this provision, which would give the bank almost complete independence – although that is what the RBA has effectively had since the act was established in 1959 as, to my knowledge, the veto has never been exercised.
That said, I take exception to the secretary of the Treasury being on the board of the RBA. While the bank enjoys independence “of” government – that is, in a political sense – it doesn’t enjoy independence “within” government while the Treasury secretary is a member of the board.
The combination of the governor and the secretary, as the two most powerful economic services, has been said to be intimidating to other board members in setting interest rates. For example, if each meeting starts with and is built on the presentation by the governor, usually supported by the secretary, it can be difficult for other less experienced board members to disagree with those opening assessments and recommendations.
An argument can be made to keep the secretary on the monetary board, to assist in the co-ordination of monetary and fiscal policy. But the secretary’s presence is not fundamental to the necessary co-ordination, and it should at least be made clear that the secretary is not there as a representative of the government.
All up, though the RBA review doesn’t answer all of the public’s expectations, it has met its official remit with a significant and authoritative document that outlines a viable pathway to securing an effective, well-governed and independent central bank.
The next stage is, of course, the passage of the enabling legislation through parliament. So far, the opposition has been broadly supportive of the review. And reform of the RBA is really not an issue that should be reduced to political point-scoring. It is clearly in the national interest to get this right, to ensure genuine accountability. The government is to be commended for initiating this genuine reform of a key institution in the management of our economy. In a sense this builds on – and attempts to complete – the Hawke–Keating reforms that deregulated our financial system.
This article was first published in the print edition of The Saturday Paper on April 29, 2023 as "The RBA’s 51 steps".
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