Australian Economy

Reserve Bank of Australia review panel eyes a second board for central bank as part of overhaul

“And so some people have suggested that that gets split out.”

The Bank of Canada and Bank of England have a board of directors that oversee management and administration of the bank, while separate monetary policy committees set interest rates.

“It’s really a question of clarity of roles and responsibilities and having the right people assigned to the right job,” Ms Wilkins said.

A ‘really high bar’ to pass

“As well as having a better ability to have an enterprise-wide view of operational governance like a regular board would do, while at the same time allowing the monetary policy group or monetary policy board to really focus on those decisions and have the time that they need.”

Any potential recommendation to change the board structure would need to consider whether two boards would add bureaucracy to the central bank, she said.

Moreover, a legislative change to the Reserve Bank Act would also be required, which would be a “really high bar” to pass, Ms Wilkins said.

Treasurer Jim Chalmers initiated an independent review of the central bank in July, including the long-standing inflation target, monetary tools, board structure, accountability and culture, amid growing criticisms of the central bank’s interest rate policies.

Australian National University economics professor Renee Fry-McKibbin, former senior Treasury official Gordon de Brouwer and former Bank of Canada senior deputy governor Ms Wilkins have received more than 100 written submissions, surveyed more than 1000 RBA staff and interviewed former senior RBA officials and outside economists.

Dr Gordon de Brouwer, Carolyn Wilkins and Renée Fry-McKibbin, with moderator Melinda Cilento of CEDA. AFR

They are due to report their findings in March.

Professor Fry-McKibbin said there was broad agreement that the flexible inflation target had worked well over the past 30 years and most people did not think it required change.

The 2 per cent to 3 per cent inflation target in the statement of monetary policy between the governor and treasurer was “about right”, but the “on average over time” stipulation was a “little bit vague” and could be made clearer, she said.

However, Professor Fry-McKibbin said there was likely to be different supply shocks in the future from climate change, energy prices and geopolitical events, so it was worth considering the merits of a different target such as nominal income, price level or average inflation.

“So we’re looking at all of those, those different types of frameworks,” she said.

RBA criticisms

Former RBA board member Warwick McKibbin, the husband of Professor Fry-McKibbin, has been the most vocal advocate of central banks dumping inflation targeting in favour of nominal income, as the global economy enters a period of more frequent shocks.

Submissions to the review have raised criticisms of the RBA’s wrong forward guidance during the pandemic that interest rates would probably not rise until 2024 and its related yield curve target that ended abruptly.

Dr de Brouwer said the bank was “slow” to recognise the inflation pressures and must be very clear on its “exit strategy” from unorthodox policies.

“The lesson to take from that is agility in different frameworks and making sure that there’s contestability and a range of views that are available,” he said.

Culturally among the RBA’s 1400 staff, Dr de Brouwer said “hierarchy” and “silos” should be broken down to encourage debate and contestability from staff at different levels and to improve decision-making.

“It’s not as open, it’s not as contestable, in terms of its internal debate as it could be.”

The review is also considering the role of the Treasury secretary on the RBA board and whether it is consistent with independence from the government.

The treasurer appoints board members, usually in close consultation with the RBA governor and Treasury secretary.

The reviewers raised the prospect of having a more formal and transparent application and appointment process.

Dr de Brouwer said the job of RBA board members was not to represent a particular “constituency”, but rather to represent the interests of the Australian people on price stability and full employment.

If the government pursues any changes to the RBA, Treasurer Jim Chalmers is seeking bipartisanship with the Coalition.

“The government wants the review to be as bipartisan as possible – that’s why I’ve ensured the opposition has been kept up-to-date on its progress,” Dr Chalmers said.

The RBA review panel briefed shadow treasurer Angus Taylor on Wednesday.

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