Treasurer ‘keen’ to commence RBA review

Twelve economists including Grattan Institute chief executive Danielle Wood and Centre for Independent Studies chief economist Peter Tulip have banded together to send a letter to the Treasurer, on a review of the Reserve Bank of Australia (RBA).

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”.

Now the government has been confirmed, the group of economists has said the pending review “presents a once-in-a-generation opportunity” but the devil is in the detail, warning poorly crafted terms of reference have the potential to undermine how effective it could be.

They also wrote of a need to conduct an assessment of the RBA’s mandate amid unprecedented economic shocks.

“Now is the time for a wide-ranging, independent review of our monetary policy framework and our monetary authority,” the letter stated.

On Twitter, Mr Chalmers indicated that he is working towards a review, via a retweet of the letter.

“As I work through the best model and terms of reference, weigh up all these issues and discuss with the PM and our colleagues, the RBA, Treasury and others; I’m grateful for the advice and input,” the Treasurer stated.

“I’m keen to get the ball rolling relatively soon if we can.”

Mortgage Business has contacted Treasury for further comment, but is yet to receive a response.

The RBA is set to review its pandemic response this year and its governor Philip Lowe has previously expressed confusion around what supporters of a review want to assess.

But the group of economists has insisted the probe needs to be independent of both the RBA and government and it needs to be spearheaded by a foreign expert.

“Full independence is crucial if the review is to make the most of this unique opportunity,” the letter said.

“No institution can be expected to independently or credibly review itself. A foreign perspective would bring valuable external scrutiny to the process and enable a benchmarking of the RBA against its overseas counterparts.”

It is common for reviews of central banks to be led by foreign players, the letter added, pointing to assessments such as the Reserve Bank of New Zealand by Stockholm University professor Lars Svensson in 2001 and the Bank of England by former Federal Reserve governor Kevin Warsh in 2014.

The economists have also said the review should be “wide-ranging”, encompassing the Reserve Bank Act (the act that established the RBA as Australia’s central bank), the statement on the conduct of monetary policy and the central bank as an institution, along with its decision-making.

The coalition wants an examination of the RBA’s structure and culture, its composition and appointment of the board and the ways in which it communicates with the public.

Further, the letter has asked that the review look at performance and how well the RBA is placed to handle challenges, as well as the interaction between fiscal and monetary policy.

“We are energised by the prospect of a review and optimistic for what it may achieve. Australia is counting on it,” the economists wrote.

The 12 signatories to the letter are:

• University of Queensland professors of economics Begona Dominguez and Join Quiggin
• University of Melbourne professor of economics Chris Edmond
• Corinna Economic advisory Saul Eslake
• Australian National University (ANU) Crawford School of Public Policy professors Renee Fry-McKibbin and Warwick McKibbin
• George Washington University assistant professor of economics Steven Hamilton
• University of New South Wales (UNSW) Business School professor of economics Richard Holden and associate professor of banking and finance Kristie Romero Cortes
• Deloitte Access Economics partner Chris Richardson
• Centre for Independent Studies chief economist Mr Tulip
• Grattan Institute CEO Ms Wood

The RBA’s role has been questioned previously, with researchers from the UNSW’s City Futures Research Centre arguing the central bank’s mandate should include housing system stability and the monitoring of house prices, like its New Zealand equivalent.

However, the recent parliamentary inquiry into housing argued against changing the RBA’s mandate and policy setting to include housing, stating “housing prices should not be an objective of monetary policy”.

[Related: ‘Everything has a limit’: RBA predicts housing to cool]