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The last time the Reserve Bank of Australia (RBA) was subjected to an independent government review was in 1981, when Malcom Fraser was prime minister.
But Treasurer Jim Chalmers today announced that the RBA would be subjected to a wide‑ranging review that will look into its core operations and culture.
Among the areas under scrutiny will be the RBA’s objectives, mandate, the interaction between monetary, fiscal and macroprudential policy, its governance, culture, operations, and more.
In announcing the government’s “commitment to conduct a broad‑based review of the setting of monetary policy in Australia,” Mr Chalmers said Australia is facing a complex and rapidly changing economic environment, as well as a range of long‑term economic challenges.
“This is an important opportunity to ensure our monetary policy framework is the best it can be, to make the right calls in the interests of the Australian people and their economy,” he said.
Changing the official cash rate, which flows through to interest rates, is the primary tool the RBA has to control inflation.
While Mr Chalmers and Reserve Bank governor Philip Lowe both strongly backed a 2-3 per cent “flexible” inflation target as the best monetary policy for Australia, its effectiveness has come under scrutiny.
The RBA lowered the cash rate to a record low of 0.1 per cent during the earlier stages of the COVID-19 pandemic but has recently had to chase surging inflation with rapid hikes.
There was criticism it held rates for too high for too long when the pandemic took hold and more recently concerns raised about the pace of interest rate hikes as it tackles surging inflation.
New Reserve Bank Deputy Governor Michele Bullock on Tuesday warned of the inevitability of more interest rate rises.
“I’m not aware yet of a better, more appropriate regime for Australia but that’s the whole point of the review,” Mr Chalmers told the ABC.
“If they can learn from the Canadian experience of inflation targeting, if they can learn from the experience of other central banks around the world, I think that’s a good thing.”
In a speech to the Australian Strategic Business Forum on Wednesday, Mr Lowe acknowledged the policy challenge of returning inflation to the 2–3 per cent target range while also keeping the economy on an even keel.
“We don’t need to return inflation to target immediately, as we have long had, for good reasons, a flexible medium-term inflation target but we do need to chart a credible path back to 2–3 per cent.
“We are seeking to do this in a way in which the economy continues to grow and unemployment remains low.
“It is certainly possible to do this, but the path ahead is a narrow one and it is clouded in uncertainty.
“Global factors, including Russia’s invasion of Ukraine, are one source of this uncertainty and domestically, the path back to 2–3 per cent inflation will be shaped by how the general inflation psychology in Australia evolves and how Australians respond to higher interest rates, so these are some of the issues we will be watching carefully over the months ahead,” he said.
Who reviews the RBA?
The RBA is the only major central bank in the world not to have undergone an independent review this century. The last time its core operation was examined was as part of the Campbell review that delivered its report to the Fraser government in 1981.
A panel of three experts from Australia and overseas, independent of the RBA and outside of the Treasury Department, will lead the Review:
- Carolyn Wilkins, an external member of the Financial Policy Committee of the Bank of England and former Senior Deputy Governor to the Bank of Canada
- Professor Renée Fry‑McKibbin, one of Australia’s leading macroeconomists and Interim Director of the Crawford School of Public Policy at the Australian National University
- Dr Gordon de Brouwer PSM, an eminent Australian economist and Secretary for Public Sector Reform with 35 years’ experience in public policy and administration in Australia, including at Treasury and the RBA.
The panel will be supported by a secretariat with Treasury and other staff.
They will produce a final report with recommendations to Government by March 2023.
Mr Chalmers said the review panel will consult with domestic and global experts, former members of the Board, and members of the public and will seek submissions to ensure a wide range of opinions are considered.
“It will draw on some of the world’s best and brightest experts to ensure the RBA has the right objectives, policies, governance and culture for the future.”
The “board structure, experiences and expertise, composition and the appointments process” will be part of the review’s remit.
Appointments to the RBA are often drawn from the business community, which differs from the approach of countries such as the United States, where the board of its Federal Reserve is comprised of economists.
RBA Governor Philip Lowe’s seven-year term is due to end next year.
Mr Chalmers also announced on Wednesday that business leader Mark Barnaba had agreed to the 12-month extension to his position on the Board. Mr Barnaba’s five-year term was due to end on 30 August.
“An accomplished business leader, corporate adviser and non-executive director, Mr Barnaba has been a well-respected and valued member of the Reserve Bank board,” Mr Chalmers said in a statement.
“I commend Mr Barnaba on his valuable contribution to the board so far and sincerely thank him for agreeing to continue in this capacity for the next 12 months.”
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