Central banks around the world separated governance from interest rate policy long ago, but the Reserve Bank of Australia remains stuck in the past, loyal to a system that is no longer fit for its purpose.
Now, following an independent review, Treasurer Jim Chalmers has announced historic reforms to the RBA, including the abolition of the board and the creation of two separate bodies – one to set interest rates and the other to oversee the bank’s governance and day-to-day operations . The board will be stripped of its power to set interest rates and replaced by a committee of monetary policy experts that will meet eight times a year rather than once a month as it currently does. The review also recommends that the bank governor hold a press conference after each meeting and that new MPC members speak publicly at least once a year.
Putting experts in charge of key changes to interest rate policy is a much-needed overhaul given the condemnation the RBA has drawn after 10 consecutive rate hikes. In theory, the RBA board should draw from a broad community base, but a growing number of members come from the big end of town, most of whom lack expertise in monetary policy.
The proposed reforms would bring the RBA in line with international peers such as the Bank of England and the Federal Reserve, while ending a system first proposed during the Great Depression.
The RBA has been heavily criticized for years and this review is the first external review of the bank since the early 1980s, followed by Herald Survey raises concerns about how banks conduct monetary policy Before the COVID-19 pandemic. The investigation showed that the bank set official interest rates with an eye toward meeting its charter to keep inflation between 2% and 3% but has missed its own target every year since 2014.
Chalmers announced agreement in principle with all 51 recommendations made by the review team, but full implementation of these recommendations remains to be seen, given the government’s habit of picking and choosing what they want and letting other reforms wither over time. The first recommendation of the review that comes to mind: “The government should remove the Treasurer’s power to veto RBA decisions.”
Chalmers also broke the Coalition-era board appointment chain by announcing two new board members, former Fair Work chair Iain Ross and company director Elana Rubin, would replace long-term board members Wendy Craik and Mark Barnaba, whose terms were coming to an end . They will join the existing nine-member RBA board structure, which is expected to remain in place until legislation for a new dual-board system is passed – the coalition has pledged bipartisan support for reforms – and could be established this year or next.
As the RBA’s public face, the scathing scrutiny is a public humiliation of Governor Philip Lowe, who has not only overseen record-low interest rates and 10 consecutive rate hikes, but also smacks of the bank being seen as politicized. He appeared to admit at a forum last July that a series of fiscal incentives by governments and central banks had fueled soaring inflation during the COVID-19 pandemic, an allegation he was hardly vocal about.Moreover, when Lowe hinted that the RBA would Keep the official interest rate at 0.1% Until 2024. After being thrown off the bus, Lowe said he would accept re-election as governor. His seven-year term expires in September.
Reform of the RBA is long overdue. It is hoped that the changes spelled out in the review will lead to better outcomes for the national economy and ease the pain of inflation currently being caused by interest rates on people struggling with the cost of living.
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