RBA Review will 'refine and reform' rather than revolutionise: Treasurer

On Wednesday (20 July), federal Treasurer Jim Chalmers MP announced some of the key aspects of the upcoming review of the Reserve Bank of Australia (RBA) — the first since the 1990s.

Prior to the election, both major parties had committed to an inquiry into the RBA, with Jim Chalmers in particular, stating that Labor supported an investigation of the central bank’s “goals and objectives, tools and levers, processes and public commentary”.

Speaking in a range of mainstream media TV interviews this morning, Mr Chalmers outlined some of the key aspects of the review, which is expected to complete in March 2023 with a set of clear recommendations to government.

Mr Chalmers told journalists that the RBA review "will consider the RBA's objectives, mandate, the interaction between monetary, fiscal and macroprudential policy, its governance, culture, operations and more".

He said it would include reviewing the "appropriateness of the inflation-targeting framework", the make-up of "board structure, experiences and expertise, composition and the appointments process", the conduct of the bank "during crises and when monetary policy space is limited".

Specifically, the review will assess the RBA’s objectives, as outlined in the Reserve Bank Act (1959) and in the Statement on the Conduct of Monetary Policy, including the continued appropriateness of the inflation-targeting framework.

It will also consider its choice of policy tools, policy implementation, policy communication, and how trade‑offs between different objectives have been managed.

However, the review will exclude APRA’s statutory role or functions and exclude the RBA’s payments, financial infrastructure, banking, and banknotes functions.

The review will be led by Carolyn Wilkins (an external member of the Financial Policy Committee of the Bank of England and Canadian central banker), Australian National University economics professor Renee Fry-McKibbin and former senior Treasury official, Gordon de Brouwer. The trio were said to be Jim Chalmers' "first choice" to lead the review. 

The Treasurer commented: "I am absolutely delighted that we've got the panel that we got. They were my first three choices. And I'm very grateful, very appreciative to them for agreeing to do what will be a pretty challenging task."

Treasury has said that the review will also "consult extensively with domestic and global experts, and members of the public" and take account of analysis conducted in prior reviews of other central banks, including the US Federal Reserve, the Bank of Canada, the Reserve Bank of New Zealand and the European Central Bank.

It may also invite and publish submissions and seek information from interested parties.

'Reforming not revolutionising monetary policy in Australia'

"This is not about revolutionising monetary policy in Australia. It's about reviewing it, and then refining it and reforming it," Treasurer Chalmers said.

"I go into this review with an open mind, a genuinely open mind, about the best combination of institutional arrangements for the Reserve Bank, so that we have the world's best central bank, relying and adapting, and adopting world's best practice, learning from the past but focused on the future."

Playing down any suggestions that the review would be a “witch hunt” or would take “potshots” at the RBA’s forecasting (given it had previously suggested that rates would not rise until 2023-2024), Mr Chalmers said: “I think the world of [RBA governor] Philip Lowe… he's capable of defending the decisions of the board himself. 

“I've come to these arrangements today (that I'm announcing about the review) in a collaborative way, working with him and working with others and briefing the opposition, because I want it to be the right kind of forward-looking exercise and not a backward-looking, second-guessing exercise.”

He told The Today Show, “What we'd like to do is to give our Reserve Bank the best set of arrangements, the best mandate objectives, the best board that we can, so that it can make good decisions into the future about Australians interest rates. 

“I'm not interested in an exercise in taking potshots at the bank or taking potshots at the governor. I'm really forward-looking and trying to make sure that we learn from recent experience to improve the reserve bank into the future.”

When asked what he thought about the RBA’s forecasting models, Mr Chalmers said: “Well, that's one of the things we want to look at. We want to make sure that the decisions that they make, which are often difficult decisions (and it's not easy right now to make monetary policy here in Australia and around the world)…  we want to make sure that they get it right in the future. And part of doing that is to make sure they've got the right kind of institution that gives them the best chance to get the forecast right to get the decisions.”

The Treasurer continued that the RBA was not alone in doing the “difficult, heavy lifting in our economy on its own”, adding that there was also “a role for government top”.

Referring to comments made by RBA deputy governor Michelle Bullock yesterday (19 July), Mr Chalmers recognised that the “point that Michelle was making is that some people have been able to build a buffer in their home loans, which is true of some people”, but added: “I think we do need to recognise that people are doing it really tough.”

“I think, in the main, people will find it really hard to find room in their household budgets for these interest rate rises, at the same time as they're paying the skyrocketing costs of electricity and petrol and groceries.”

As well as announcing the headline terms of reference for the RBA Review, Mr Chalmers also revealed an extension of an appointment to the RBA Board.

Mr. Mark Barnaba's current five-year term as a part-time member on the board was due to expire on the 30 August,. However, he has now agreed to extend his term by a year, taking his tenure beyond the finalisation of the review into the RBA.

The @RBAinfo Review I announced today is all about renewing, revitalising and building confidence in the Reserve Bank. #auspol #ausecon pic.twitter.com/3e0fjeb1I7 – Jim Chalmers MP (@JEChalmers) 19 July 2022

Terms of reference are 'appropriate': Lowe

Speaking in his address to the Australian Strategic Business Forum 2022 in Melbourne this morning, RBA governor Philip Lowe noted the review, stating: "I would like to welcome the announcement today by the government of the details of the review of Australia's monetary policy arrangements and the Reserve Bank.

"The terms of reference are appropriate and the Government has appointed a first-class panel," he said.

"The review is also welcomed by the Reserve Bank Board and the bank's staff.

"It is an opportunity to take stock of our monetary policy arrangements and make sure that they are fit for purpose for the challenges ahead.

"We look forward to participating in this process and listening to and learning from others."

[Related: Household equity to ward off debt concerns: RBA]