The Reserve Bank of Australia (RBA) will undergo a major shake-up that will see the governor hold a press conference after each meeting on interest rates to explain the decision to mortgage holders.
The move is one of 51 recommendations to come from the first external review of the central bank in four decades.
Under the reforms, the current RBA will be stripped of its power to set interest rates, with a new nine member panel of monetary policy experts to be instituted instead.
The panel will be made up of six externally appointed economic experts along with the RBA governor, the deputy governor and the secretary of the treasury.
The external members would be experts in macro-economics, monetary specialists and labour markets.
“By including six external members, the monetary policy board would be weighted in favour of external members,” the review said.
“This would provide a healthy counterbalance to the influence of internal members.”
The number of times the panel meets to decide on interest rates and other monetary policy issues will also drop from 11 times a year to eight, so that it can conduct more “in-depth discussions”, including greater forecasts.
After each meeting the review recommends holding a press conference to explain to homeowners its decision on interest rates.
“The RBA should better explain its policy choices through regular press conferences and increasing the amount of information available about policy deliberations, strategy, and the RBA’s forecasts,” the review said.
“The RBA’s communications should include the reasoning behind decisions, what alternative policy options were considered, and how current policy settings fit into a broader strategy.”
In releasing the review, Federal Treasurer Jim Chalmers said the Albanese Government agreed in-principle with all of the review’s recommendations and would work with the RBA, parliament and other stakeholders to implement them.
“The review, its recommendations and our response are all about ensuring the Reserve Bank has the best framework, objective, processes and expertise,” he said.
“Australia faces a complex and rapidly changing environment, and we need the most effective central bank and monetary policy framework to meet current and future economic challenges.”
Other recommendations include the establishment of an RBA Governance Board, which would be separate from the Monetary Policy Board.
The governance board would have an external chair and oversee the RBA’s organisational strategy, finances, strategic staff planning and risk management (including cyber risks).
“It should have no role in monetary, financial stability or payments policy or the day to day running of the RBA,” the review said.
The review also recommended the RBA appoint a chief operating officer to focus on improving systems and processes and to create a “more agile organisation that better empowers staff”.
Mr Chalmers said the review also found that the RBA had a strong reputation domestically and overseas.
“The review found that the RBA is a well-regarded institution, with high quality staff that has served Australia well,” he said.
“It found that Australia’s monetary policy framework had contributed to good economic outcomes over the past three decades but identified a number of opportunities to strengthen it.”
Mr Chalmers said, subject to consultations with the Opposition, the Government intended to introduce legislation to:
- reinforce the independence of the RBA in the operation of monetary policy;
- strengthen the RBA’s mandate and clarify that Australia’s monetary policy framework will have dual objectives of price stability and full employment; and
- establish a separate Monetary Policy Board and Governance Board to ensure decision making and corporate governance arrangements are as effective as they can be.
“I will work with the RBA Board to agree a new Statement on the Conduct of Monetary Policy to be finalised before the end of 2023,” he said.
In a press conference following the release of the review, RBA Governor Dr Philip Lowe welcomed its conclusions and recommendations.
“The Review has been timely, with the RBA facing an increasingly complex world and operating environment,” he said.
“The recommendations will help us deal with this more complex world and will strengthen the monetary policy process and governance of the RBA.”
Touching on the recommendation to establish a monetary policy and separate governance boards, Dr Lowe said each was a good idea.
“I have thought for some time that there was a strong case to strengthen the governance of the RBA as an institution,” he said.
Dr Lowe said the RBA was responsible for a lot more than just monetary policy, including being the banker to the government, printer of banknotes and passports, the manager of Australia’s foreign exchange reserves and being the operator of critically important payment infrastructure, and that he was the accountable authority.
“As you know, there is a 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,” he said.
“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.”
Dr Lowe said the RBA Board would consider issues such as the number of times it meets, its approach to communication and how it works at upcoming meetings.
“It will develop a holistic response, given that many of the recommendations in this area are interrelated and will have flow-on effects for how we do our work and how parts of the bank are structured,” he said.
“We will publish a detailed response later this year after the necessary work has been completed.”