MNI: Separate Monetary Committee Seen Likely Under RBA Review

The upcoming review of the Reserve Bank of Australia will likely recommend the creation of a monetary policy committee which would be separate from its board, bringing the Reserve in line with international peers and ensuring research and models drive its rate decisions, former RBA staffers told MNI.

The Review’s findings handed to Treasurer Jim Chalmers earlier in the month (see: MNI Brief: Panel Reviewing RBA Tables Report) and which will be published alongside the government’s decisions this week contain 51 recommendations within a 294-page report, the former staffers said.

Jonathan Kearns, former head of the RBA’s financial stability department and now chief economist at Challenger, said a separate committee setting rates would be the most profound change the review could produce.

“It will set the tone of debate and discussion within the bank,” Kearns noted. “If [the RBA] has experts at the top asking probing questions, then that informs the type of information the Bank generates and that will lift the nature of the work produced and elevate debate internally.”

He pointed to the Bank of England’s structure, which produces quantitative, highly analytical work. “The BOE committee asks questions that someone who is the director of a retailer or a mining company is not necessarily going to ask,” he added. “Changing that structure will have an impact on the rest of the work of the Bank. Separating governance into its own committee will also take pressure off the governor who is now solely responsible for the operation of the Bank.”

The RBA board, which comprises the governor, deputy governor, the secretary to the Treasury and six appointed outsiders, currently sets the overnight cash rate. Outsiders are drawn from the business sector, with one typically recruited from academia.

Kearns says overseas examples show monetary policy committees staffed by a mix of part-time external experts and internal employees – supported by dedicated staff – can undertake better analysis and form independent views they can use to challenge other committee members.

OTHER RECOMMENDATIONS

Peter Tulip, chief economist at the Centre for Independent Studies and former senior research manager at the RBA, agreed a change to the board’s structure would be the most beneficial change, but added recommendations that increase transparency will also be important.

“Press conferences work well overseas – what we need is decisions to be explained and questioned,” he noted. “We need someone to say to the Governor, 'You say inflation is coming down, but you list 10 items pushing it up. Can you please explain?'”

The RBA paused rates at 3.6% earlier in the month (See: MNI BRIEF: RBA Pauses, Softens Language On Further Hikes). Industry experts noted the Bank, however, will likely need to hike past 4% to contain inflation.

Tulip commented: “The RBA does not want to justify or explain its monetary policy decisions. The government can demand more transparency, but it is not something that is legislated.” He said a more explicit dual mandate that incorporated maximum sustainable employment targets would also be worthwhile, but would be less likely to find bipartisan support.

BIPARTISAN SUPPORT

Speaking on the sidelines of the G20 Finance Ministers meeting in Washington this week, Chalmers noted some of the report’s recommendations would require legislative change. Angus Taylor, shadow treasurer, stated in March that the recommendations should be implemented with bipartisan support. It is understood Taylor supports full-time central bankers who focus on inflation, similar to the U.S. and U.K. systems.

Tulip noted the opposition supports substantial change and this suggests a future board shakeup. “The biggest change would be the addition of a monetary policy committee and the most obvious model is the BOE structure which has three internals and four externals,” he added.