Australian Economy

Will the new era for the Reserve Bank of Australia clarify or confuse monetary message?

And the governor will then hold a media conference, scheduled for 3.30pm. The number of board meetings will be cut from 11 to eight, with each meeting now coinciding with the release of consequential economic data.

The review process commissioned by Treasurer Jim Chalmers that led to these new arrangements was seeded, ironically, by unconvincing concern that the Reserve Bank did not cut its then 1.5 per cent cash rate even further between 2016 and 2019 when inflation was running below the official 2 per cent to 3 per cent target.

But the Reserve Bank became most vulnerable to an external review after governor Philip Lowe’s “forward guidance” from late 2020 that the cash rate was likely to remain at a record low 0.1 per cent until 2024 at the earliest. The guidance aimed to wring out an extra drop of monetary policy stimulus from near-zero interest rates.

But, at the time, The Australian Financial Review said it didn’t pass the pub test because no one could hope to accurately predict where the cash rate should be in three or four years. The reasonable question is why this unprecedented and extreme forward guidance was not challenged more at the time within the bank and its board.

The guidance, of course, was blown out of the water by the global inflation outbreak that no central bank peers – nor treasurers saw coming – and led to the Reserve Bank’s 13 cash rate increases and Dr Lowe becoming the unfortunate fall guy.

Thankfully, Dr Chalmers has limited the institutional disruption to the central bank as it tries to get inflation back to target by appointing a Reserve Bank lifer, Michele Bullock, as the new governor.

And, by appointing her to chair the Reserve Bank’s new governance board as well as the monetary policy board, Dr Chalmers has reduced the risk of conflict between the two.

Former governor Ian Macfarlane has pointed to the risks of the new arrangements, which from mid-year are due to include the publication of de-identified board votes on monetary policy.

At last week’s Bank of England monetary policy committee meeting, the nine-member board split 6-3 in favour of holding its 5.25 per cent bank steady. But the identified minority itself was split, with two members calling for an interest rate increase and one calling for a cut. How each member voted was identified too.

The question is whether highlighting such divisions on the board will clarify or complicate the Bank of England’s communications task and the governor’s authority to make hard decisions. As well, the new arrangements call for monetary policy board members to give public speeches.

But will public pronouncements about the board’s deliberations by what are essentially part-time advisory members clarify or confuse the central bank’s messaging? Could they weaken the central bank’s political independence?

The risk may depend on who Dr Chalmers appoints to the new boards. His two appointees so far – Iain Ross and Elena Rubin – are both capable professionals.

But the Treasurer should not appoint any more board members with such labour movement and ACTU backgrounds.

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