MNI: RBA Board Changes Missed Opportunity - Ex Policymakers

MNI (MELBOURNE) - A revamped Reserve Bank of Australia board with greater macroeconomic expertise would have pushed harder for a higher cash rate this year, former policymakers and independent economists told MNI, calling the government’s scrapped proposal to roll existing members into the new monetary policy board a missed opportunity.

Pointing to the Reserve's August shift to a more hawkish stance as a sign of slow reflexes, Guay Lim, research head, macroeconomics modelling at the Melbourne Institute, University of Melbourne and a member of the Australian National University's (CAMA) RBA Shadow Board, said external members with policy expertise would have been more vocal and pushed officials to examine data indicating excessive demand more closely. (See MNI POLICY: Competing Data Behind Recent Close RBA Calls)

"Would the RBA have benefited by having more external economists who are just interested in good analysis? Yes, that is clear. The RBA would also benefit from alternative views from economists inside the institution too," she said.

Understanding the drivers of inflation matter greatly, she added, as managing demand or supply factors require different policy approaches. 

BOARD ROLLOVER

Federal Treasurer Jim Chalmers offered to shift all existing board members onto the new interest rate-setting board last month as a compromise with the opposition party amid stalled negotiations over 2023’s RBA Reform recommendations, which suggested splitting the Reserve’s current board into one that focused on governance and a separate entity that decided rates. However, Shadow Treasurer Angus Taylor pulled support for the reforms Monday evening, noting concerns the federal government could stack the RBA board with union friendly appointees.

Adrian Pagan, professor of economics at the School of Economics at the University of Sydney, and an RBA board member between 1995-2000, told MNI the now defunct deal did not align with 2023's review. “Why [Treasurer] Chalmers has agreed to that is beyond me. I think if one does that then they should only be allowed to serve out their remaining term on the Board and not start again afresh.” 

Most the of the board apart from macroeconomist Ian Harper should not have their tenure renewed, he added. “If they all transfer then I think that would water down the idea of the Review.”

It is unclear whether Chalmers will attempt to negotiate with minor parties to push through the reform. 

But Renee Fry-McKibben, professor of economics in the Crawford School of Public Policy at the Australian National University and a lead author of the RBA Review, told MNI the government’s proposal was a reasonable compromise. “Having a bipartisan agreement is also important for stability,” she added. “The RBA needs to have these issues sorted out so they know what governance structure they are operating in.”

She added the creation of the governance board was also important, particularly as the RBA and financial system faced rapidly changing challenges, such as AI and cybersecurity. “When the RBA Review was written, no-one saw AI as a challenge, so circumstances can change quickly demonstrating the value of a vigilant governance board,” she continued.  

MISSED OPPORTUNITY

Sean Langcake, head of macroeconomic forecasting at BIS Oxford Economics and a former RBA economist, told MNI the current makeup of the board, dominated by business leaders, made it difficult to criticise. 

“These are very capable people who have their own areas of expertise, and it's been deemed that is relevant to the RBA, but they're not experts in monetary policy,” he added, noting the review had called for board members more able to critically engage with the research, literature, and arguments the RBA presented. “This compromise means that Chalmers is implementing a version of the review that is further away from what the authors intended.” 

The review had also called for greater scrutiny over individual board members and for them to offer more frequent public comment, noted Paul Ryan, senior economist at REA Group and a former housing market specialist at the RBA. “It’s healthy to understand the level of dissent in the boardroom around decisions and I think that’s the direction this is going,” he added. “Once we get to a point where we have a higher degree of monetary-policy expertise on the board, that's something that could be considered.”