The stalling of a proposal to create an independent monetary policy committee at the Reserve Bank of Australia is potentially a shame for Australians and a win for the RBA, experts say.
The board of the Reserve Bank of Australia (RBA) has become a political football in recent months, tossed between Labor, which wants to see more technical macroeconomic expertise, and the opposition, which fears politically motivated appointments.
On the sidelines, Australians are puzzled about whether splitting the RBA board into two – one for operations and governance, the other for monetary policy with macroeconomic experts – would actually affect their mortgage repayments.
Meanwhile economists argue the debate has only damaged the central bank’s credibility – as would macroeconomists questioning the RBA's views.
So, how does the RBA operate currently, what did the proposed reforms aim to achieve, and now they've stalled, who loses out?
What is the RBA's power?
Governed by a board led by the governor – currently Michele Bullock – the RBA oversees currency issuance, monetary policy and financial stability with the aims of keeping inflation stable, growing the economy and ensuring full employment.
Economist Michele Bullock has been governor of the Reserve Bank of Australia for 13 months. Picture: Supplied
Sometimes it makes unpopular decisions, like raising interest rates to curb spending, which means it must remain independent from the government.
However, while board members technically serve apolitically, some are appointed by the government.
Jonathan Kearns, chief economist at Challenger and a former RBA executive, says the current situation isn't optimal.
"Ideally, the people being selected for the board would not depend on the government of the day; they would be selected on their credentials," he says.
"Monetary policy should be set independently of election cycles."
Since its establishment in 1960, the RBA has undergone various reforms to enhance efficiency and independence.
In the 1990s, it gained operational independence to set interest rates free from political interference. In 1993, it adopted an inflation-targeting framework, specifying a target range for inflation of 2-3%.
Why calls for new reforms and why were they blocked?
Recently, demands for reform have intensified. Pre-Covid, inflation and growth were deemed too low. Post-pandemic, there's debate over using interest rate hikes to combat inflation since it heavily impacts homeowners and businesses.
"In hindsight, you could argue the Reserve Bank was too agile," says AMP chief economist Shane Oliver.
Questions arose around the board's expertise and potential conflicts of interest. And if better governance and transparency could enhance the RBA's ability to handle current economic challenges.
The 2023 review, An RBA for the Future, suggested changes that have already been implemented including less frequent interest rate decisions, fewer media conferences, and clearer communication to the public.
However, dropping the treasurer's veto power faced opposition, and the proposal for an independent monetary policy committee, which would comprise six independent economists, stalled over concerns of political stacking by the government.
How would an independent monetary policy committee impact us?
The review provided no evidence that an independent monetary committee would impact interest rates or inflation.
AMP chief economist Shane Oliver says an independent monetary policy board wouldn't necessarily have led to lower interest rates. Picture: Supplied
Timo Henckel, senior lecturer of economics at Australian National University and chair of ANU's Reserve Bank of Australia Shadow Board, supports a monetary committee and believes having more transparent and independent board members who can commission their own research and make public statements would benefit the Australian public.
"That would help educate people about monetary policy and in the long run, improve it," he says.
Mr Oliver thinks an independent monetary policy board wouldn't necessarily have led to lower interest rates. In fact, it could have made them higher.
"Countries like the UK, New Zealand and Canada, with separate rate-setting boards, ended up with higher rates than Australia," he adds.
"I don't think these reforms would result in a different outcome for people with a mortgage or businesses with debt."
Do we need greater expertise on the RBA board?
Ms Bullock has largely stayed out of the debate around an independent monetary committee, but has claimed she's keen to capture the "full range" of staff views captured at internal policy meetings.
The Bank of England is an example of a central bank that has a separate rate-setting board. Picture: Getty
"This summary of the diversity of staff views will complement the policy recommendation I make at each meeting," she said in November.
Nevertheless, experts agree there's a need for greater technical macroeconomic expertise on the board, which the independent committee could provide.
"The changes would improve the rigor of the RBA’s analysis and policy decision making," says Mr Kearns. "At critical junctures, such as in the pandemic or on the cusp of a substantial downturn or breakout of inflation, greater insights and more rigorous questioning could avoid a costly policy error.
"The board members have very different skills to those you find on policy-setting committees at other central banks, where you typically find many economics or finance PHDs with years of economic experience in policy making, industry or academia."
Mr Henckel agrees the lack of technical skills is a valid issue and believes an independent committee is "best practice".
"You'd want people to be able to talk through the modeling efforts and that's not really possible at the moment. The discussion is likely to be too simplistic and not at the cutting edge of current economic research."
Experts say the RBA board is made up of directors with different skills to those on the policy-setting committees at other central banks. Picture: Getty
Mr Oliver agrees the board's expertise is "not as broad as it could be", but he isn't in favour of a separate board stuffed with macroeconomic policy experts.
"I like the current approach of having some economists there, but also some people who are broadly representative of what's going on in the community," he tells Mortgage Choice.
"A better option may be to retain the current structure and agree on a bipartisan way to appoint future members."
What's the outcome of the debate?
The review had led many Australians to question the RBA's credibility.
"Regular reviews of central banks are common in other countries but new to Australia," Mr Henckel says.
The Bank of Canada is one of many central banks that have faced review, something that is new to the RBA. Picture: Getty
"Now that someone's opened the lid and commented on the corporate structure and the culture, that may have caused a little bit of distrust in the institution, but I see that as short term."
However Mr Oliver warns a monetary policy board dominated by economists would also reduce the RBA's authority.
"Economists can be an egotistical bunch who could gang up against the RBA representatives on the board and reduce their authority if they're out there giving speeches.
"You'd have a situation where the RBA is defending a position that is not its own.
"In the end, the blocking of the proposed reforms leaves the RBA as the ultimate winner."
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