A scathing review of the Reserve Bank of Australia has delivered a shake-up to the central bank not seen in a generation.
The review made 51 recommendations about how the central bank should function to better target inflation and employment, and be more transparent with the Australian people about the decisions it makes that affect them.
If you haven’t read the 294-page report — or are confused about the economic jargon — here’s what the review says, what it means for interest rates, your mortgage and for RBA Governor Philip Lowe.
What is the RBA review?
Treasurer Jim Chalmers commissioned the review into the RBA in July last year, saying it was about “ensuring we have the world’s best and most-effective central bank in the future”.
It is the first review of the RBA since the central bank started to target inflation back in the early 1990s.
Mr Chalmers said the review would examine:
- The RBA’s transparency
- Who sits on its board
- How it comes to its decisions on the cash rate, its (currently) monthly conclusion that impacts interest rates.
The review came at an opportune time, too. It was announced right after the RBA raised interest rates for the second-straight month to counter rising inflation — two years after Governor Philip Lowe infamously said rates were unlikely to rise until at least 2024.
It was compiled by Australian National University professor Renee Fry-McKibbin, former senior Treasury official Gordon de Brouwer and Canadian central banker Professor Carolyn Wilkins.
A copy of the review was provided to the Treasurer last month, and it was released publicly on Thursday.
What does the review say?
A lot: there’s close to 300 pages of it, after all.
If we boil it down, the crux is that the central bank needs to undergo some major changes to ensure it is “fit for the future” (which is, fittingly, the title of the review).
Those changes are largely related to two common themes throughout the review: transparency and communication.
It’s made a staggering 51 recommendations, which all come back to wanting decisions about the cash rate to be made with broad input, and reasons for those changes being made are to be much clearer to the public.
However, the main headline from the review is that the central bank’s board should be split in two — which means the RBA board in its current form would no longer be in charge of determining interest rates.
Why is the RBA board being split into two?
It’s for a couple of reasons: to ensure there’s a greater diversity of views, and having more monetary policy experts making decisions.
The review says the RBA board, as it currently stands, doesn’t allow for sufficient scrutiny or challenging of “the RBA’s underlying economic and financial judgements or policy advice”.
Currently, the RBA board’s members are:
- Two RBA members
- The Treasury secretary
- Five businesspeople
- An academic.
Instead, the review recommends there be two boards at the RBA going forward: the monetary policy board, and the corporate governance board.
As the name suggests, the monetary policy board would look at monetary policy decisions — meaning they would be the ones thinking about what to do with the cash rate to manage inflation.
The review recommends the monetary board should be made up of:
- The RBA governor
- The deputy governor
- The Treasury secretary
- Six external members.
Those external members would serve on the board for five years with staggered end dates, would have specialities in macro-economics, the financial system and labour markets, and would be recruited transparently.
“It is expected that members could include business leaders or others with relevant expertise, alongside academic and professional economists,” the review said.
The corporate governance board would, instead, focus on the day-to-day operations of the central bank, and wouldn’t have a say on monetary policy.
Instead, they would be the accountable authority of the RBA.
The review also recommended that an external chair be appointed to head up the governance board, meaning the RBA governor wouldn’t be in charge — that external chair would, instead, head up the monetary policy board.
As it currently stands, Governor Philip Lowe is responsible for both of those things, but even he’s conceded the current arrangement of the RBA board does not meet today’s standards.
By splitting the board into these two different areas would mean the RBA has a similar structure to how central banks operate in Canada and England.
What does this mean for interest rates?
At the moment, the RBA board meets 11 times a year on the first Tuesday of every month (except January) to determine what it should do with the cash rate, based on a range of economic indicators.
However, the review reckons that needs a shake-up, too.
Moving forward, it wants the monetary policy board to meet eight times a year.
The justification for cutting back on the number of meetings is so the the board can have more time considering monetary policy and strategy, and looking at all of the economic data available to them before making a decision.
Its idea behind having fewer meetings is that it gives the economy more time to digest the board’s latest decision.
That’s because monetary policy is notoriously slow to come into effect, a situation economists call a “lag”.
That means monthly interest rate meetings would be a thing of the past, which means we won’t get back-to-back rate hikes (or pauses, or cuts) every four weeks.
Theoretically, fewer meetings means fewer changes to rates, which gives households more room to breathe and time to adjust to a new decision.
Although it also potentially means larger moves will be necessary at each meeting, as we’ve recently seen with the US Federal Reserve and the Reserve Bank of New Zealand.
What are some other recommendations?
With a review as thorough as this, it’s not surprising that there’s been so many recommendations made.
Apart from splitting up the board, the review has also recommended the RBA governor holds a press conference after every monetary board meeting.
At the moment, the only time we hear from the RBA after its monetary policy meeting is in its written decision, issued at 2:30pm AEST, with remarks attributed to its governor.
We get some more insight a couple of weeks later, when the RBA issues the minutes of its most-recent meeting.
Sometimes, we hear more from the RBA governor himself, if he has an address planned — such as at the National Press Club earlier this month, or at industry summits.
Overall, that’s very little communication from the governor, who is announcing decisions that impact all of us — and that’s one thing the review says needs to change.
The idea is that, by holding a press conference, the governor can explain the decision the board came to, and answer a range of questions put by journalists about the economy, so that its monetary policy is clearer to the everyday Australian (after all, the RBA’s decisions affect all of us).
This review has also narrowed the RBA’s mandate to focus on inflation and employment, marking a shift away from its original mandate in 1959, which focused on inflation, unemployment and economic prosperity.
Instead, the review says, economic prosperity should now be a general principle, making it an “overarching purpose” for the central bank, so its monetary policy can solely focus on price stability and full employment.
When will the recommendations come into effect?
Before any of this can come into reality, the federal government needs to pass a bunch of legislation first.
Treasurer Jim Chalmers said the federal government supported all of the 51 recommendations “in-principle”, but he wants bipartisan support, meaning the opposition will have to be on side.
On Thursday, Shadow Treasurer Angus Taylor said the opposition would be reviewing the recommendations before committing, but was hopeful it could be bipartisan, given both the opposition and government agree on the RBA needing to maintain its independence.
Of course, drafting and passing legislation takes time, and finalising next month’s federal budget is the current priority for the government.
Taking all of this into consideration, Mr Chalmers is hopeful the changes to the RBA could take effect by July next year.
What does the review mean for my mortgage?
In the short-term, not a whole lot.
We are less than a fortnight away from the RBA’s next meeting, but the experts don’t think the review will have much of an impact on the outlook for the cash rate.
Deloitte Access Economics head Pradeep Philip said the changes would not made a difference to households and businesses who were battling rising mortgage repayments and inflation, but it would “go a long way” to improving the RBA in the long-run.
Investment bank UBS also does not think the review is going to change how the RBA makes its interest rate decisions, for now.
“Overall, it’s unlikely the RBA review will materially change the outlook for the cash rate in the near-term, given the changes are not immediate,” it noted.
“UBS still expect the RBA will hike rates by 25 basis points (0.25 percentage points) to 3.85 per cent, most likely at their next meeting in May.”
Of course, once the changes come in, fewer meetings will give households more time to absorb the interest rate rises.
However, if you’re looking for relief in the short-term, the RBA review has no silver lining to offer.
What does this mean for Philip Lowe?
The review has made no recommendation about the future of the governor, whose current term comes to an end in September.
“This review is not a judgement on the past six months. We have looked back over three decades,” the review notes.
The current RBA governor has been at the helm since 2016, and with the RBA for many years before that.
Already there’s been plenty of speculation about his future, but he told a press conference on Thursday that he would accept being returned as governor for a second term.
However, the decision ultimately rests with Jim Chalmers: As treasurer, he’s the man who appoints the governor (and that process has been recommended to continue).
Before the review was handed down, there was already plenty of political argy-bargy about whether Philip Lowe should stay or go.
There has been vocal criticism within Labor and the Greens of Mr Lowe’s term as governor and urging that he not be reappointed for a second term.
Shadow Treasurer Angus Taylor refused to weigh in on whether Mr Lowe should be reappointed for a second term, saying it was a matter for Treasury.
When asked on Thursday, Mr Chalmers said we can expect to learn who will head up the central bank before Mr Lowe’s time is up in September.
Regardless, the spotlight will be on Mr Lowe again in less than a fortnight, when the RBA board meets to consider where to next with the cash rate.