Reserve Bank set for shake-up after review

A major overhaul is in store for the Reserve Bank of Australia, with the widely anticipated review putting forth 51 recommendations, with particular consideration given to how cash rate decisions are made.

Released today, An RBA fit for future comes amid widespread criticism for the central bank's fiscal response and on the back of governor Philip Lowe's 2020 prediction that rates wouldn't rise until 2024. However, it states: "This Review is not a judgement on the past six months. We have looked back over three decades."

The 294-page document suggests a raft of extensive changes, the most significant of which is a recommendation to split the RBA board in two - much like the structure of the Bank of England and Bank of Canada.

This would see the creation of a Monetary Policy Board and a Corporate Governance Board; the former would look at monetary policy decisions and financial system stability alone, while the latter would be focused on corporate governance.

The Monetary Policy Board would comprise the governor as chair, deputy governor, treasury secretary, and six external members who would serve for a maximum of six years. The idea is that the board is weighted in favour of external members to reduce influence of internal members, the review reads. It's expected that treasurer Jim Chalmers will name two external board members today.

Interestingly, it's been recommended that the governor not chair the Corporate Governance Board. Instead, one of five external members would be chair and the governor would be a member of the board. The final member would be a chief operating officer for the RBA, the appointment of which is a recommendation.

Another major recommendation is that the number of RBA board meetings be reduced from 11 per year to eight, providing more time for the board to take advice and consider its position. It would also give households more time to absorb future interest rate increases. Further, following each meeting, it's suggested the governor hold a press conference explaining each decision in addition to a written statement.

In regards to the governor themselves, it has been recommended the treasurer be responsible for choosing the governor and deputy governor. As for Lowe, his term is due to complete later this year and Chalmers is being pressured on a number of fronts not to renew his contract.

Reinforcing the independence of the RBA has also been flagged, with a suggestion to remove the treasurer's power to veto any RBA decisions on monetary policy.

The review was conducted and authored by Australian National University professor Renee Fry-McKibbin, former senior Treasury official Gordon de Brouwer and Canadian central banker Carolyn Wilkins. They have suggested the changes that require legislative reform be implemented from July next year, while those that do not should be implemented this year.

In response, Lowe stated: "I have thought for some time that there was a strong case to strengthen the governance of the RBA as an institution. The RBA is responsible for many nationally important functions in addition to monetary policy. These include being the banker to the government, the operator of critically important payments infrastructure, the printer of banknotes and passports, and the manager of Australia's foreign exchange reserves. So there is a lot more than just monetary policy."

"Under the Reserve Bank Act 1959, I, as the governor, am charged with managing the bank and I am also the accountable authority under the Public Governance, Performance and Accountability Act 2013. As you know, there is great deal of public visibility of, and commentary about, our monetary policy decisions, but there is much less oversight of how I discharge my responsibilities to manage the RBA.

"From a number of perspectives, current oversight arrangements fall short of contemporary standards. The proposed changes would address this and help the governor manage the bank and its many functions.

"The recommended changes could also strengthen the monetary policy process, by having a board whose sole focus is monetary policy. I very much welcome the conclusion that this board should include people with diverse perspectives and knowledge and who have experience in decision-making under uncertainty. It is also pleasing to see that the panel recommended that the Treasury Secretary remain on the board."

This article first appeared on Financial Standard

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