MNI: RBA's Macroprudential Change Seen Impacting Rates

Impending reforms at the Reserve Bank of Australia to alter its mandate and interaction with financial regulators open the way to the use of macroprudential measures to address financial imbalances more directly than with the blunt tools of interest-rate policy, industry experts and ex-staffers told MNI.

Plans revealed earlier this month for a memorandum of understanding with members of the Council of Financial Regulators (CFR) and the Australian Prudential Regulation Authority (APRA) should give the RBA access to policy levers unavailable to it previously, such as during the period from 2016-19 when its decision to keep the cash rate at 1.5% was likely influenced by concerns over loose APRA lending standards, said James Morley, professor of macroeconomics at the University of Sydney.

“In terms of more oversight, this would directly be the result of having a say in alternative instruments than interest rates to address possible imbalances in credit conditions,” said Morley said, though he noted that the extent of the RBA's future influence on APRA and macroprudential standards has yet to be revealed.

One of the RBA Review’s 50 recommendations called for more “formalised cooperation arrangements for financial stability policy" including a provision for the central bank to provide formal advice to APRA on its use of macroprudential tools.

SIMPLIFIED OBJECTIVES

The Review also called for simplification of the Bank’s objectives to include price stability and full employment, removing its “economic prosperity and welfare of the Australian people” mandate.

“For the dual mandate, the argument is a bit more subtle,” Morley said. “But the idea is that by formally focusing on price stability and full employment, the RBA would not be in the same position to instead appeal to the very broad concern for the 'welfare of the Australian people' to justify interest rate policy that does not focus on price stability and full employment.”

Mariano Kulish, University of Sydney professor and a former RBA senior manager, said it was possible the Reserve could have used macroprudential tools during the pre-pandemic period rather than hold the cash rate higher, though he cautioned that this was “a difficult counterfactual to assess because it is quite far from the current framework.”

Some have pushed back on the idea of the RBA using macroprudential tools altogether. Paul Ryan, senior economist at REA Group and a former housing market specialist at the RBA, warned against the Reserve using prudential tools to affect the business cycle. "If you want to have a mortgage serviceability buffer that changes throughout the cycle, then the prudential regulator fundamentally needs to forecast interest rates and I don't think that should be its role," he said. "I think we can achieve the same result with robust prudential rules and the RBA adjusting interest rates to move the [business] cycle.”

REFORM AHEAD

Kulish noted two other reforms – the inclusion of more expert external board members and a reduction in the RBA Board’s meeting schedule – could also have a significant positive impact on monetary policy. Fewer meetings, with the RBA’s 2024 schedule seeing the number of decisions cut to eight from 11, will allow staff to spend more time preparing analysis, while more data will be available to base decisions.

RBA staff interacting more with board members could also present a fundamental cultural shift at the bank "but we must see how it is implemented in practice," Kulish said. "This is an opportunity to bring in more expertise into decision making and help strengthen the RBA's analysis."

Deputy Governor Michelle Bullock will spearhead further RBA Reform when she takes over the governorship in September.