MNI INTERVIEW: RBA Needs Prudential Tools, More Fiscal Sight

The Reserve Bank of Australia should regain control of macroprudential regulatory tools, while Treasury should have greater representation on the yet-to-be created monetary policy board to streamline monetary policy coordination, a former RBA board member told MNI.

Adrian Pagan, professor of economics in the School of Economics at the University of Sydney, and RBA board member between 1995-2000, noted the central bank's recent Review, which published its findings earlier in the year, may have missed an opportunity to boost coordination between three key elements of the economy.

According to Pagan, the Bank of England’s Financial Policy Committee offered a credible model the RBA could have replicated in regards to macroprudential control, while giving the Treasury greater input on the new rate-setting board would have allowed for more information sharing and coordination between the government and the Reserve.

The RBA Review called for the central bank and Australian Prudential Regulatory Authority to formalise cooperation arrangements on financial stability policy. RBA Governor Philip Lowe in July revealed the Reserve would sign a new memorandum of understanding with the Council of Financial Regulators and APRA, but details were not disclosed (See MNI: RBA's Macroprudential Change Seen Impacting Rates).

The RBA and the APRA sit together on the CFR, however, the Reserve wants more control over macroprudential policy – a change Pagan argued for during the review’s submission phase. He noted the Reserve had introduced some macroprudential tools into its MARTIN macroeconomic model, but had to rely on APRA via the CFR to influence policy, which was confusing and cumbersome.

Pagan said including Treasury’s head of macro as well as the Treasury secretary on the new board would also help government and the Reserve better coordinate their responses to the economy. He added Treasury had tremendous resources and know-how, and its presence was important to coordinate fiscal and monetary policy.

MNI reported recently Australia’s contractionary fiscal policy would likely weigh on employment and further slow the economy in 2024 more so than monetary policy. (See MNI INTERVIEW: Fiscal Stance More Restrictive Than Rates-ExRBA)

Pagan had suggested having two Treasury representatives on the MPC, which would not diminish the RBA’s independence. “The issue is that any independent authority that makes policy should be subject to the best criticism when proposing it," he argued. “One wants to have the best people doing that and the head of macro in Treasury has always seemed to me to be needed on the monetary policy board, perhaps more so than the secretary.”

The RBA will begin implementing the review’s recommendations next year with the new board, led by incoming Governor Michele Bullock, set to start by July.