Usually, the Reserve Bank of Australia is only in the spotlight when its board meets to set the country’s official interest rate on the first Tuesday of every month, bar January.
But, in April, all eyes were on the RBA following the release of an independent review into the central bank. This is the first external review of the RBA in four decades and came about due to increased public scrutiny of its monetary policy decisions following the pandemic.
The review analysed the RBA’s performance over the past 30 years, paying particular attention to the central bank’s:
The final report made 51 recommendations, all of which have been accepted “in principle” by the federal government.
So here’s everything you need to know about what’s set to change at the RBA – and what isn’t.
What are the recommended changes?
The most significant of the review’s recommendations was for the creation of a new monetary policy board, made up of macro-economists, monetary policy specialists and labour market experts, as well as the RBA governor, the deputy governor and the Treasury secretary.
This new board would be in charge of determining interest rates and would meet eight times a year, rather than 11, to “allow for more in-depth discussions including of the forecast, strategy and other monetary policy issues.”
The review called for the monetary policy process to be more transparent, with press conferences after each meeting and for board members to speak publicly about their role.
A separate ‘governance board’ with an external chair would oversee the RBA’s organisational strategy, finances, strategic staff planning and risk management, but would have no role in setting monetary or payments policy, or in the day-to-day running of the central bank.
This new structure would bring the RBA in line with many of its global peers, such as the Bank of England and the Bank of Canada.
Inflation target still “appropriate”
Currently, the RBA is tasked with controlling inflation so that consumer prices grow at an annual rate of between 2-3% each year. It does this by raising or lowering the cash rate – which is the market interest rate on overnight funds borrowed by the banks. This, in turn,
affects the broader economy.
The review said it supports this flexible target, as “it is well understood, it is credible to the public, and has supported good economic outcomes. There is sound evidence that it has supported stable inflation expectations over the past three decades.”
That said, the review thinks the new Monetary Policy Board should aim to keep inflation around the midpoint of the target (2.5%) to “maximise the chances that the target is met”.
What does this mean for interest rates?
While the review will likely lead to a major overhaul of the central bank, it’s unlikely to have much impact on the outlook for interest rates in Australia.
That’s because the recommendations will only alter the way interest rates are set, and not the reason for moving them up or down. Moreover, by explicitly saying the RBA’s target of 2-3% was appropriate, its likely interest rates will remain relatively high until annual inflation (currently 4.1%) returns to the target range.
What happens next?
When the report was released, Treasurer Jim Chalmers said the federal government would work with the RBA, the parliament and other stakeholders to implement its recommendations.
“This review, its recommendations and our response are all about ensuring the Reserve Bank has the best frameworks, objectives, processes and expertise,” he said.
“Australia faces a complex and rapidly changing environment, and we need the most effective central bank and monetary policy framework to meet current and future economic challenges.”
Mr Chalmers said bipartisan support will be critical as some of the recommendations will need to be implemented by legislation.
The review recommended the government legislate these changes to start from 1 July 2024.
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