RBA Board to be replaced by panel of experts: how does this affect interest rates?

The Reserve Bank of Australia (RBA) Board is expected to relinquish its mandate to set the official cash rate and hand over duties to a separate panel of experts and specialists, according to advice outlined in an independent review.

Treasury has released the RBA Review, first announced in July 2022. The almost 3,000-word report offers 51 recommendations, including the establishment of a new Monetary Policy Board to oversee changes to the national cash rate and a separate Governance Board, responsible for the day-to-day operations of the bank.

The review, entitled ‘An RBA fit for the Future’, was produced by an independant panel consisting of former Bank of Canada senior deputy governor and now Bank of England financial policy committee member Carolyn Wilkins; Australian National University's Crawford School interim director Renee Fry-McKibbin; and the Secretary for Public Sector Reform Gordon de Brouwer. The report was presented to the Treasurer on 31 March 2023.

How will these changes affect interest rates

A new Monetary Policy Board would not alter the RBA’s independence from the government of the day or its underlying objective to keep inflation within the target range of between 2-3%, according to the report's guidance.

While a different panel of fiscal experts - purportedly better equipped with specialist skills to make monetary policy decisions - could be given the power to set the cash rate and influence bank interest rates, it appears unlikely that this would have any radical effects.

The review was commissioned by Treasurer Jim Chalmers shortly after the RBA began raising the cash rate from May 2022. Between June and September last year, there were four consecutive double rate hikes (50 basis points).

The Board came under fire for its intense, rapid tightening of monetary policy, particularly since it had asserted in late 2021 that it was likely to hold the cash rate steady until 2024.

It’s reasonable to assume that a new Monetary Policy Board may be more cautious, careful and considerate about delivering expeditious changes to the cash rate, which subsequently affects millions of Australians.

However, there is no certainty about how a new policy-setting board might act. Until representatives are announced and cash rate decisions are made, we won't know the prevailing impact a new board may have on interest rates.  

Changing to keep pace with other central banks

Australia’s monetary policy is currently set by the RBA Board. Most other central banks entrust a monetary policy committee to determine the cash rate, while the management of the bank itself is the responsibility of a governor or board of directors, similar to a private company.

The review found that the economic expertise of the RBA Board’s external members is lower than that of comparable central banks, such as the Bank of England, US Federal Reserve, Norges Bank and Reserve Bank of New Zealand.

"This has limited the depth of challenge and debate at the Reserve Bank Board. For example, during the pandemic, people with a deeper understanding of the financial system may have been better placed to offer alternate views on the design of the complex monetary policy tools proposed," according to the review.

"The Monetary Policy Board should have a clear focus on policy decision making, with no broader organisational role... This reinforces other recommendations to create more opportunities for challenge and debate on policy among decision makers. A clear and narrow set of responsibilities fosters accountability."

What other recommendations have been proposed?

This is the first external analysis of the RBA since the early 1980’s. Some issues that the review considered included: 

• How to improve the bank’s approach to monetary policy
• The bank’s decision-making abilities
• The composition of the bank’s rate-setting board
• The bank’s performance when compared with its objectives
• How well the bank explains its policy decisions

The report recommends that the Monetary Policy Board should comprise the RBA Governor, Deputy Governor,
Treasury Secretary and six external members, with the Governor as chair. The Governor will also be expected to appear at a press conference following policy setting meetings to publicly explain the bank’s decisions.

The review advocates that the Monetary Policy Board should meet eight rather than 11 times per year to allow for more in-depth discussions including of the forecast, strategy and other monetary policy issues. There were also recommendations to increase forecasting and macroeconomic modelling capabilities and improve transparency.

The report’s findings are recommendations and, as such, any changes to the way in which monetary policy is set will require amendments to the RBA’s operating legislation, the RBA Act. The government will need bipartisan support from the opposition to enact any reforms. Shadow Treasurer Angus Taylor told ABC Radio this morning that the proposed changes and the review's directions were, at face value, "positive" and "well worth consideration". 

Treasurer Jim Chalmers said he’s seeking parliamentary support from across the aisle to implement the review’s recommendations, while some of the changes will be established by the RBA itself. Chalmers will also announce two new RBA Board members on Thursday, to replace retiring members Wendy Craik and Mark Barnaba.

In a statement released earlier today, the RBA acknowledged and accepted the outcomes of the review and agreed to work constructively with the government to actualise suggested innovations and improvements.  

“The Bank will develop a plan to implement these changes in the most effective way," the RBA said.

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